PRUDENTIAL MUNICIPAL BOND FUND, 497, 1998-07-02

PRUDENTIAL MUNICIPAL BOND FUND
497, 1998-07-02

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PRUDENTIAL MUNICIPAL BOND FUND

Statement of Additional Information
dated July 1, 1998

Prudential Municipal Bond Fund (the Fund) is an open-end, diversified,
management investment company, or mutual fund, consisting of three separate
portfolios--the High Income Series, the Insured Series and the Intermediate
Series. The investment objectives of the Series are as follows: (i) the
objective of the High Income Series is to provide the maximum amount of income
that is eligible for exclusion from federal income taxes, (ii) the objective of
the Insured Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital and (iii) the objective of the Intermediate Series is to provide a high
level of income that is eligible for exclusion from federal income taxes
consistent with the preservation of capital. Although each Series will seek
income that is eligible for exclusion from federal income taxes, a portion of
the dividends and distributions paid by each Series (and, in particular, the
High Income Series) may be treated as a preference item for purposes of the
alternative minimum tax. Each Series seeks to achieve its objective through the
separate investment policies described under "Investment Objectives and
Policies." There can be no assurance that the Series' investment objectives will
be achieved.

The Fund's address is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.

This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated July 1, 1998, a copy of
which may be obtained from the Fund upon request.

TABLE OF CONTENTS

<TABLE>
<CAPTION>
CROSS-REFERENCE
TO PAGE IN
PRUDENTIAL
MUNICIPAL BOND
PAGE FUND PROSPECTUS
---- ---------------
<S> <C> <C>
General Information.................................. B-2 35
Investment Objectives and Policies................... B-2 18
Investment Restrictions.............................. B-9 28
Trustees and Officers................................ B-10 28
Manager.............................................. B-14 29
Distributor.......................................... B-16 29
Portfolio Transactions and Brokerage................. B-18 31
Purchase and Redemption of Fund Shares............... B-19 37
Shareholder Investment Account....................... B-22 37
Net Asset Value...................................... B-25 32
Taxes, Dividends and Distributions................... B-25 33
Performance Information.............................. B-28 32
Organization and Capitalization...................... B-31 35
Custodian, Transfer and Dividend Disbursing Agent and
Independent Accountants............................ B-33 31
Financial Statements................................. B-34 --
Independent Accountants' Report...................... B-78 --
Appendix I -- General Investment Information......... I-1 --
Appendix II -- Historical Performance Data........... II-1 --
Appendix III -- Information Relating to The
Prudential......................................... III-1 --
</TABLE>

MF133B
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GENERAL INFORMATION

On May 3, 1995, the Trustees approved a change in the name of the Modified
Term Series to the Intermediate Series, effective June 29, 1995. On June 23,
1998, the Trustees approved a change in the name of the High Yield Series to the
High Income Series, effective July 1, 1998.

INVESTMENT OBJECTIVES AND POLICIES

Prudential Municipal Bond Fund is a diversified, open-end, management
investment company consisting of three separate portfolios: the High Income
Series, the Insured Series and the Intermediate Series. The investment
objectives of the Series are as follows: (i) the objective of the High Income
Series is to provide the maximum amount of income that is eligible for exclusion
from federal income taxes, (ii) the objective of the Insured Series is to
provide the maximum amount of income that is eligible for exclusion from federal
income taxes consistent with the preservation of capital and (iii) the objective
of the Intermediate Series is to provide a high level of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. There can be no assurance that any Series will achieve its objective.
Although each Series will seek income that is eligible for exclusion from
federal income taxes, a portion of the dividends and distributions paid by each
Series (and, in particular, the High Income Series) may be treated as a
preference item for purposes of the alternative minimum tax.

The investment objective of each Series may not be changed without the
approval of the holders of a majority of the outstanding voting securities of
such Series. A "majority of the outstanding voting securities" of a Series, when
used in the Prospectus or this Statement of Additional Information, means the
lesser of (i) 67% of the voting shares of a Series represented at a meeting at
which more than 50% of the outstanding voting shares of a Series are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares of a Series.

Each Series will seek to achieve its investment objective by investing in a
diversified portfolio of obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which is eligible for exclusion from federal income taxation (municipal
obligations or municipal securities). Each Series pursues its investment
objective through the separate investment policies described below and in the
Prospectus. There can be no assurance that the Series' investment objectives
will be achieved.

THE HIGH INCOME SERIES

The High Income Series invests primarily in municipal obligations rated B or
better by Moody's Investors Service (Moody's) or Standard & Poor's Ratings Group
(S&P) or a similar nationally recognized statistical rating organization (NRSRO)
having maturities generally in excess of ten years. The Series also will invest
in municipal obligations having maturities ranging from one year to ten years.
The weighted average maturity of the portfolio is expected to range between 15
and 30 years.

THE INSURED SERIES

The Insured Series invests primarily in municipal obligations which are
insured, rated in the highest rating category of Moody's or S&P or a similar
NRSRO, or backed by the U.S. Government. The Series may also invest up to 5% of
its total assets in municipal obligations rated A/A or Aa/AA by Moody's or S&P,
respectively, or a similar NRSRO. It is anticipated that the Series will offer
generally lower yields and be subject to less credit and market risk than the
High Yield Series.

It is anticipated that, under current market conditions, a great majority of
the municipal obligations held by the Insured Series will be insured by the
following entities: MBIA Insurance Corporation (MBIA Corp.), AMBAC Indemnity
Corporation (AMBAC), Financial Guaranty Insurance Company (FGIC) and Financial
Security Assurance Inc. (FSA). Each of these entities is described more fully
below. The Series will not invest in obligations insured by The Prudential
Insurance Company of America (Prudential), except as may be permitted by
applicable law, nor will it settle any claim under portfolio insurance provided
by an insurer whose insurance obligations are reinsured by an affiliate of
Prudential for less than full payment except in accordance with an exemptive
order obtained from the Securities and Exchange Commission (Commission).

MBIA Corp. (formerly known as Municipal Bond Investors Assurance
Corporation) is the principal operating subsidiary of MBIA Inc., a New York
Stock Exchange listed company. As of December 31, 1997, MBIA Corp. had admitted
assets of approximately $5.256 billion, total liabilities of approximately
$3.496 billion and total policyholders' surplus of approximately $1.760 billion.
MBIA Inc. is not obligated to pay the debts of or claims against MBIA Corp. MBIA
Corp. is domiciled in the state of New York and licensed to do business in all
50 states, the District of Columbia, the Commonwealth of Puerto Rico, the
Commonwealth of the Northern Mariana Islands, the Virgin Islands of the United
States and the Territory of Guam. MBIA Corp. has one European branch in the
Republic of France.

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FGIC Corporation, the owner of FGIC, is a wholly-owned subsidiary of General
Electric Capital Corporation. Neither FGIC Corporation nor General Electric
Capital Corporation is obligated to pay the debts of or claims against FGIC. As
of December 31, 1997, FGIC had admitted assets of approximately $2.535 billion,
total liabilities of approximately $1.279 billion and total policyholders'
surplus of approximately $1.256 billion.

AMBAC is a Wisconsin-domiciled stock insurance corporation regulated by the
Office of the Commissioner of Insurance of the State of Wisconsin and licensed
to do business in 50 states, the District of Columbia and the Commonwealth of
Puerto Rico, with admitted assets of approximately $2.842 billion, total
liabilities of approximately $1.872 billion and total policyholders' surplus of
approximately $1.00 billion as of December 31, 1997. Statutory capital consists
of AMBAC policyholders' surplus and statutory contingency reserve. AMBAC is a
wholly-owned subsidiary of AMBAC, Inc., a 100% publicly-held company.

FSA is a wholly-owned subsidiary of Financial Security Assurance Holdings,
Ltd. (Holdings), a New York Stock Exchange listed company. Holdings is owned
approximately 40.4% by US West Capital Corporation (US WEST), 11.5% by Fund
American Enterprises Holdings, Inc. (Fund American), and 6.4% by The Tokio
Marine and Fire Insurance Co., Ltd. (Tokio Marine). Neither US WEST, Fund
American, Tokio Marine nor any other shareholder of Holdings is obligated to pay
the debts of or claims against FSA. As of December 31, 1997, FSA had admitted
assets of approximately $1.331 billion, total liabilities of approximately $.832
billion and total policyholders' surplus of approximately $.498 billion. The
company formerly known as Capital Guaranty Insurance Company is now a subsidiary
of FSA.

THE INTERMEDIATE SERIES

The Intermediate Series invests primarily in municipal obligations rated Baa
or BBB or better by Moody's or S&P, respectively, or a similar nationally
recognized statistical rating organization, with maturities of 3 to 15 years and
with a dollar-weighted average portfolio maturity of more than 3 and less than
10 years. Under normal circumstances, at least 60% of the municipal obligations
purchased by the Series will be rated A or better by Moody's or S&P. It is
anticipated that this Series will offer generally lower yields and be subject to
less market risk than the High Yield Series or the Insured Series.

GENERAL

The Prudential Investment Corporation (PIC), doing business as Prudential
Investments (PI, the Subadviser or the investment adviser), maintains a
fixed-income research group which provides credit analysis and research on
fixed-income securities. The portfolio manager consults routinely with the
research group in managing the Fund's portfolios. The fixed-income research
group, which currently maintains a staff of 26 persons including 22 credit
analysts, reviews on an ongoing basis issuers of fixed-income obligations,
including prospective purchases and portfolio holdings of the Series. Credit
analysts have broad access to research and financial reports, data retrieval
services and industry analysts. They review financial and operating statements
supplied by state and local governments and other issuers of municipal
securities to evaluate revenue projections and the financial soundness of
municipal issuers. They study the impact of economic and political developments
on state and local governments, evaluate industry sectors and meet periodically
with public officials and other representatives of state and local governments
and other tax-exempt issuers to discuss such matters as budget projections, debt
policy, the strength of the regional economy and, in the case of revenue bonds,
the demand for facilities. They also make site inspections to review specific
projects and to evaluate the progress of construction or the operation of a
facility.

Each Series may invest in municipal securities which are not rated if, based
upon a credit analysis by the Subadviser, the Subadviser believes that the
securities are of comparable quality to other municipal securities that the
Series may purchase. A description of the ratings is set forth under the heading
"Description of Security Ratings" in the Fund's Prospectus. The ratings of
Moody's and S&P represent the respective opinions of those firms of the quality
of the securities each undertakes to rate. The ratings are general and are not
absolute standards of quality. In determining the suitability for investment in
a particular unrated security, the Subadviser will take into consideration asset
and debt service coverage, the purpose of the financing, the history of the
issuer, the existence of other rated securities of the issuer, any credit
enhancement by virtue of a letter of credit or other financial guaranty deemed
suitable by the investment adviser and other factors as may be relevant,
including comparability to other issuers.

After its purchase by a Series of the Fund, an issue of municipal bonds or
notes may cease to be rated or its rating(s) may be reduced. Neither event
requires the elimination of that obligation from the portfolio of the Series,
but each event will be a factor in determining whether the Series should
continue to hold that issue in its portfolio.

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Each Series will attempt to invest substantially all of its net assets in
municipal securities. Under normal market conditions, each Series anticipates
that its assets will be invested so that at least 80% of its net assets will be
invested in municipal securities. Each Series will continuously monitor its
portfolio to ensure that the asset investment test is met at all times, except
for temporary defensive positions during abnormal market conditions.

A Series may invest its assets from time to time on a temporary basis in
debt securities, the interest on which is subject to federal, state or local
income tax: (i) pending the investment or reinvestment in municipal securities
of the proceeds from the sale of shares of the Series or sales of portfolio
securities, (ii) in order to avoid the necessity of liquidating portfolio
investments to meet redemptions of shares by investors, or (iii) where market
conditions due to rising interest rates or other adverse factors warrant
temporary investing. Investments in taxable securities may include: obligations
of the U.S. Government, its agencies or instrumentalities; commercial paper
rated in the two highest grades by either Moody's or S&P (A-1 and A-2, or P-1
and P-2, respectively), except that the Insured Series may invest only in
commercial paper rated A-1 or P-1; certificates of deposit and bankers'
acceptances; other debt securities rated within the three highest grades by
either Moody's or S&P or, if unrated, judged by the Subadviser to possess
comparable creditworthiness; and repurchase agreements with respect to any of
the foregoing investments. Each Series does not intend to invest more than 5% of
its assets in any one category of the foregoing taxable securities. A Series may
also hold its assets in other cash equivalents or in cash.

The Fund, as well as each Series of the Fund, is classified as diversified
under the Investment Company Act of 1940, as amended (the Investment Company
Act). This means that with respect to 75% of the assets of a Series, (i) the
Series may not invest more than 5% of its total assets in the securities of any
one issuer (except U.S. Government obligations) and (ii) the Series may not own
more than 10% of the outstanding voting securities of any one issuer. For
purposes of diversification and concentration under the Investment Company Act,
the identification of the issuer of the municipal obligation depends upon the
terms and conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, the subdivision is regarded
as the sole issuer. Similarly, in the case of an industrial development revenue
bond or pollution control revenue bond, if the bond is backed only by the assets
and revenues of the non-governmental user, the non-governmental user is regarded
as the sole issuer. If, in either case, the creating government or another
entity guarantees an obligation, the guaranty may be regarded as a separate
security and treated as an issue of the guarantor.

Each Series will treat an investment in a municipal bond refunded with
escrowed U.S. Government securities as U.S. Government securities for purposes
of the Investment Company Act's diversification requirements provided: (i) the
escrowed securities are "government securities" as defined in the Investment
Company Act, (ii) the escrowed securities are irrevocably pledged only to
payment of debt service on the refunded bonds, except to the extent there are
amounts in excess of funds necessary for such debt service, (iii) principal and
interest on the escrowed securities will be sufficient to satisfy all scheduled
principal, interest and premiums on the refunded bonds and a verification report
prepared by a party acceptable to a nationally recognized statistical rating
agency, or counsel to the holders of the refunded bonds, so verifies, (iv) the
escrow agreement provides that the issuer of the refunded bonds grants and
assigns to the escrow agent, for the equal and ratable benefit of the holders of
the refunded bonds, an express first lien on, pledge of and perfected security
interest in the escrowed securities and the interest income thereon, (v) the
escrow agent had no lien of any type with respect to the escrowed securities for
payment of its fees and expenses except to the extent there are excess
securities, as described in (ii) above, and (vi) the Series will not invest more
than 25% of its total assets in pre-refunded bonds of the same municipal issuer.

Since securities issued or guaranteed by states or municipalities are not
voting securities, there is no limitation on the percentage of a single issuer's
securities which a Series may own so long as, with respect to 75% of its assets,
it does not invest more than 5% of its total assets in the securities of that
issuer (except obligations issued or guaranteed by the U.S. Government). As for
the other 25% of the assets of a Series not subject to the limitation described
above, there is no minimum limitation as to the number of issuers in whose
securities these assets may be invested.

The Fund expects that normally a Series will not invest 25% or more of its
total assets in any one sector of the municipal obligations market, including:
hospitals; nursing homes, retirement facilities and other health facilities;
turnpikes and toll roads; solid waste and resource recovery; ports and airports;
colleges, universities and other educational facilities; state and local housing
finance programs; obligations of municipal water and sewer utilities systems,
obligations of municipal electric and gas utilities systems; or other industrial
development and pollution control facilities. However, depending upon prevailing
market conditions, a Series may have 25% or more of its total assets invested in
any one sector of the municipal obligations market. Each of the foregoing types
of investments might be subject to particular risks which, to the extent that a
Series is concentrated in such investments, could affect the value or liquidity
of the Series' portfolio.

B-4
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A portion of the dividends and distributions paid on the shares of each
Series of the Fund may be treated as a preference item for purposes of the
alternate minimum tax for individuals and corporations. Such treatment may cause
certain investors, depending upon other aspects of their individual tax
situation, to incur some federal income tax liability. The Fund's Subadviser
intends (except with respect to the High Income Series) to invest in securities
so as to minimize the portion of such dividends or distributions that are
treated as a tax preference item. In addition, corporations are subject to an
alternative minimum tax which treats as a tax preference item 75% of a
corporation's adjusted current earnings. A corporation's adjusted current
earnings would include interest paid on municipal obligations and dividends paid
on shares of the Fund. See "Taxes, Dividends and Distributions."

As in the past, proposals may be submitted to Congress in the future with
the intended effect of eliminating or further restricting the issuance of
municipal obligations or the federal tax exemption for interest paid on
municipal obligations. In that event, the Fund may re-evaluate its investment
objectives.

Unlike many issues of common and preferred stock and corporate bonds which
are traded between brokers acting as agents for their customers on securities
exchanges, municipal obligations are customarily purchased from or sold to
dealers who are selling or buying for their own account. Most municipal
obligations are not required to be registered with or qualified for sale by
federal or state securities regulators. Since there are large numbers of
municipal obligation issues of many different issuers, most issues do not trade
on any single day. On the other hand, most issues are always marketable, since a
major dealer will normally, on request, bid for any issue, other than obscure
ones. Regional municipal securities dealers are frequently more willing to bid
on issues of municipalities in their geographic area.

Although almost all municipal obligations are marketable, the structure of
the market introduces its own element of risk; a seller may find, on occasion,
that dealers are unwilling to make bids for certain issues that the seller
considers reasonable. If the seller is forced to sell, he or she may realize a
capital loss that would not have been necessary in different circumstances.
Because the net asset value of a Series' shares reflects the degree of
willingness of dealers to bid for municipal obligations, the price of a Series'
shares may be subject to greater fluctuation than shares of other investment
companies with different investment policies. See "Net Asset Value."

MUNICIPAL SECURITIES

Municipal securities include notes and bonds issued by or on behalf of
states, territories and possessions of the United States and their political
subdivisions, agencies and instrumentalities and the District of Columbia, the
interest on which is generally eligible for exclusion from federal income tax
and, in certain instances, applicable state or local income and personal
property taxes. Such securities are traded primarily in the over-the-counter
market.

MUNICIPAL BONDS. Municipal bonds are issued to obtain funds for various
public purposes, including the construction of a wide range of public facilities
such as airports, bridges, highways, housing, hospitals, mass transportation,
schools, streets, water and sewer works and gas and electric utilities.
Municipal bonds also may be issued in connection with the refunding of
outstanding obligations and obtaining funds to lend to other public institutions
or for general operating expenses.

The two principal classifications of municipal bonds are general obligation
and revenue. General obligation bonds are secured by the issuer's pledge of its
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable only from the revenues derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source.

Industrial development bonds (IDBs) are issued by or on behalf of public
authorities to obtain funds to provide various privately-operated facilities for
business and manufacturing, housing, sports, pollution control, and for airport,
mass transit, port and parking facilities. Although IDBs are issued by municipal
authorities, they are generally secured by the revenues derived from payments of
the industrial user. The payment of the principal and interest on IDBs is
dependent solely on the ability of the user of the facilities financed by the
bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for the payment.

MUNICIPAL NOTES. Municipal notes generally are used to provide for
short-term capital needs and generally have maturities of one year or less.
Municipal notes include:

1. TAX ANTICIPATION NOTES. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as income, sales, use and
business taxes, and are payable from these specific future taxes.

2. REVENUE ANTICIPATION NOTES. Revenue Anticipation Notes are issued in the
expectation of reception of other kinds of revenue, such as federal revenues
available under the Federal Revenue Sharing Programs.

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3. BOND ANTICIPATION NOTES. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be arranged. In most cases, the
long-term bonds then provide the money for the repayment of the Notes.

4. CONSTRUCTION LOAN NOTES. Construction Loan Notes are sold to provide
construction financing. Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is sometimes provided by a commitment
by the Government National Mortgage Association (GNMA) to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to insure
mortgage advances thereunder. In other instances, permanent financing is
provided by commitments of banks to purchase the loan.

TAX-EXEMPT COMMERCIAL PAPER. Issues of tax-exempt commercial paper, the
interest on which is generally exempt from federal income taxes, typically are
represented by short-term, unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local governments to finance
seasonal working capital needs of municipalities or to provide interim
construction financing and are paid from general revenues of municipalities or
are refinanced with long-term debt. In most cases, tax-exempt commercial paper
is backed by letters of credit, lending agreements, note repurchase agreements
or other credit facility agreements offered by banks or other institutions and
is actively traded.

FLOATING RATE AND VARIABLE RATE SECURITIES. Each Series may invest more than
5% of its assets in floating rate and variable rate securities, including
participation interests therein and inverse floaters. Floating or variable rate
securities often have a rate of interest that is set as a specific percentage of
a designated base rate, such as the rate on Treasury Bonds or Bills or the prime
rate at a major commercial bank. These securities also allow the holder to
demand payment of the obligation on short notice at par plus accrued interest,
which amount may be more or less than the amount the holder paid for them.
Variable rate securities provide for a specified periodic adjustment in the
interest rate. The interest rate on floating rate securities changes whenever
there is a change in the designated base interest rate. Floating rate and
variable rate securities typically have long maturities but afford the holder
the right to demand payment at earlier dates. Such floating rate and variable
rate securities will be treated as having maturities equal to the period of
adjustment of the interest rate.

An inverse floater is a debt instrument with a floating or variable interest
rate that moves in the opposite direction of the interest rate on another
security or the value of an index. Changes in the interest rate on the other
security or index inversely affect the residual interest rate paid on the
inverse floater, with the result that the inverse floater's price will be
considerably more volatile than that of a fixed rate bond. The market for
inverse floaters is relatively new.

LIQUIDITY PUTS. Each Series may purchase and exercise puts on municipal
bonds and notes. Puts give the Series the right to sell securities held in the
portfolio at a specified exercise price on a specified date. Puts may be
acquired to reduce the volatility of the market value of securities subject to
puts. The acquisition of a put may involve an additional cost to the Series
compared to the cost of securities with similar credit ratings, stated
maturities and interest coupons but without applicable puts. This increased cost
may be paid either by way of an initial or periodic premium for the put or by
way of a higher purchase price for securities to which the put is attached. In
addition, there is a credit risk associated with the purchase of puts in that
the issuer of the put may be unable to meet its obligation to purchase the
underlying security. Accordingly, each Series will acquire a put only under the
following circumstances: (i) the put is written by the issuer of the underlying
security and the security is rated within the quality grades in which the Series
is permitted to invest; (ii) the put is written by a person other than the
issuer of the underlying security and that person has securities outstanding
which are rated within the quality grades in which the Series is permitted to
invest; or (iii) the put is backed by a letter of credit or similar financial
guaranty issued by a person having securities outstanding which are rated within
the quality grades in which the Series is permitted to invest.

Puts will be valued at an amount equal to the difference between the value
of the underlying security taking the put into consideration and the value of
the same or a comparable security without taking the put into consideration.

LENDING OF SECURITIES. Consistent with applicable regulatory requirements,
each Series may lend its portfolio securities to brokers, dealers and financial
institutions, provided that outstanding loans do not exceed in the aggregate 33%
of the value of the Series' total assets and provided that such loans are
callable at any time by the Series and are at all times secured by cash or
equivalent collateral or obtains a letter of credit that is equal to at least
the market value, determined daily, of the loaned securities. The advantage of
such loans is that the Series continues to receive payments in lieu of the
interest and dividends on the loaned securities, while at the same time earning
interest either directly from the borrower or on the collateral which will be
invested in short-term obligations.

A loan may be terminated by the borrower on one business day's notice or by
the Series any time. If the borrower fails to maintain the requisite amount of
collateral, the loan automatically terminates, and the Series can use the
collateral to replace the securities while holding the borrower liable for any
excess of replacement cost over collateral. As with any extensions of credit,
there are risks of delay in recovery and in some cases loss of rights in the
collateral should the borrower of the securities fail

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financially. However, these loans of portfolio securities will only be made to
firms determined to be creditworthy pursuant to procedures approved by the
Fund's Trustees. On termination of the loan, the borrower is required to return
the securities to the Series, and any gain or loss in the market price during
the loan would inure to the Series.

Since voting or consent rights which accompany loaned securities pass to the
borrower, the Series will follow the policy of calling the loan, in whole or in
part as may be appropriate, to permit the exercise of such rights if the matters
involved would have a material effect on the Series' investment in the
securities which are the subject of the loan. The Series will pay reasonable
finders', administrative and custodial fees in connection with a loan of its
securities or may share the interest earned on collateral with the borrower.

FUTURES CONTRACTS. Each Series may engage in transactions in financial
futures contracts as a hedge against interest rate related fluctuations in the
value of securities which are held in the investment portfolio or which the
Series intends to purchase. A clearing corporation associated with the
commodities exchange on which a futures contract trades assumes responsibility
for the completion of transactions and guarantees that open futures contracts
will be closed. Although interest rate futures contracts call for actual
delivery or acceptance of debt securities, in most cases the contracts are
closed out before the settlement date without the making or taking of delivery.

When the futures contract is entered into, each party deposits in a
segregated account approximately 5% of the contract amount, called the initial
margin. Subsequent payments to and from the broker, called variation margin,
will be made on a daily basis as the price of the underlying security or index
fluctuates, making the long and short positions in the futures contracts more or
less valuable, a process known as "marking to market." In the case of options on
futures contracts, the holder of the option pays a premium and receives the
right, upon exercise of the option at a specified price during the option
period, to assume a position in the futures contract (a long position if the
option is a call and a short position if the option is a put). If the option is
exercised by the holder before the last trading day during the option period,
the option writer delivers the futures position, as well as any balance in the
writer's futures margin account. If it is exercised on the last trading day, the
option writer delivers to the option holder cash in an amount equal to the
difference between the option exercise price and the closing level of the
relevant index on the date the option expires.

When a Series purchases a futures contract, it will maintain an amount of
cash or other liquid assets in a segregated account so that the amount so
segregated plus the amount of initial and variation margin held in the account
of its broker equals the market value of the futures contract, thereby ensuring
that the use of such futures contract is unleveraged. A Series that has sold a
futures contract may cover that position by owning the instruments underlying
the futures contract or by holding a call option on such futures contract. A
Series will not sell futures contracts if the value of such futures contracts
exceeds the total market value of the securities of the Series. It is not
anticipated that transactions in futures contracts will have the effect of
increasing portfolio turnover.

OPTIONS ON FINANCIAL FUTURES. Each Series may purchase call options and
write put and call options on futures contracts and enter into closing
transactions with respect to such options to terminate an existing position.
Each Series will use options on futures in connection with hedging strategies.

An option on a futures contract gives the purchaser the right, in return for
the premium paid, to assume a position in a futures contract (a long position if
the option is a call and a short position if the option is a put) at a specified
exercise price at any time during the period of the option. Upon exercise of the
option, the delivery of the futures position by the writer of the option to the
holder of the option will be accompanied by delivery of the accumulated balance
in the writer's futures margin account which represents the amount by which the
market price of the futures contract, at exercise, exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of the option on
the futures contract. If an option is exercised on the last trading day prior to
the expiration date of the option, the settlement will be made entirely in cash
equal to the difference between the exercise price of the option and the closing
price of the futures contract on the expiration date. Currently options can be
purchased or written with respect to futures contracts on U.S. Treasury Bonds,
among other fixed-income securities, and on municipal bond indices on the
Chicago Board of Trade. As with options on debt securities, the holder or writer
of an option may terminate his or her position by selling or purchasing an
option of the same series. There is no guaranty that such closing transactions
can be effected.

When a Series hedges its portfolio by purchasing a put option, or writing a
call option, on a futures contract, it will own a long futures position or an
amount of debt securities corresponding to the open option position. When a
Series writes a put option on a futures contract, it may, rather than establish
a segregated account, sell the futures contract underlying the put option or
purchase a similar put option.

LIMITATIONS ON PURCHASE AND SALE. Under regulations of the Commodity
Exchange Act, investment companies registered under the Investment Company Act
are exempted from the definition of commodity pool operator, subject to
compliance with

B-7
<PAGE>
certain conditions. The exemption is conditioned upon a Series' purchasing and
selling futures contracts and options thereon for BONA FIDE hedging
transactions, except that a Series may purchase and sell futures contracts and
options thereon for any other purpose, to the extent that the aggregate initial
margin and option premiums do not exceed 5% of the liquidation value of the
Series' total assets. Each Series will use financial futures in a manner
consistent with these requirements. Each Series will continue to invest at least
80% of its net assets in municipal bonds and municipal notes except in certain
circumstances, as described in the Prospectus under "How the Fund
Invests--Investment Objectives and Policies." A Series may not enter into
futures contracts if, immediately thereafter, the sum of the amount of initial
and net cumulative variation margin on outstanding futures contracts, together
with premiums paid on options thereon, would exceed 20% of the total assets of
the Series.

RISKS OF FINANCIAL FUTURES TRANSACTIONS. In addition to the risk associated
with predicting movements in the direction of interest rates, discussed in "How
the Fund Invests--Hedging Strategies--Futures Contracts and Options Thereon" in
the Prospectus, there are a number of other risks associated with the use of
financial futures for hedging purposes.

Each Series intends to purchase and sell futures contracts only on exchanges
where there appears to be a market in the futures sufficiently active to
accommodate the volume of its trading activity. There can be no assurance that a
liquid market will always exist for any particular contract at any particular
time. Accordingly, there can be no assurance that it will always be possible to
close a futures position when such closing is desired; and, in the event of
adverse price movements, the Series would continue to be required to make daily
cash payments of variation margin. However, if futures contracts have been sold
to hedge portfolio securities, these securities will not be sold until the
offsetting futures contracts can be purchased. Similarly, if futures have been
bought to hedge anticipated securities purchases, the purchases will not be
executed until the offsetting futures contracts can be sold.

The hours of trading of interest rate futures contracts may not conform to
the hours during which the Series may trade municipal securities. To the extent
that the futures markets close before the municipal securities market,
significant price and rate movements can take place that cannot be reflected in
the futures markets on a day-to-day basis.

RISKS OF TRANSACTIONS IN OPTIONS ON FINANCIAL FUTURES. In addition to the
risks which apply to all options transactions, there are several special risks
relating to options on futures. The ability to establish and close out positions
on such options will be subject to the maintenance of a liquid secondary market.
Compared to the sale of financial futures, the purchase of put options on
financial futures involves less potential risk to a Series because the maximum
amount at risk is the premium paid for the options (plus transaction costs).
However, there may be circumstances when the purchase of a put option on a
financial future would result in a loss to a Series when the sale of a financial
future would not, such as when there is no movement in the price of debt
securities.

An option position may be closed out only on an exchange which provides a
secondary market for an option of the same series. Although a Series generally
will purchase only those options for which there appears to be an active
secondary market, there is no assurance that a liquid secondary market on an
exchange will exist for any particular option, or at any particular time, and
for some options, no secondary market on an exchange may exist. In such event,
it might not be possible to effect closing transactions in particular options
with the result that a Series would have to exercise its options in order to
realize any profit and would incur transaction costs upon the sale of underlying
securities pursuant to the exercise of put options.

Reasons for the absence of a liquid secondary market on an exchange include
the following: (i) there may be insufficient trading interest in certain
options; (ii) restrictions may be imposed by an exchange on opening transactions
or closing transactions or both; (iii) trading halts, suspensions or other
restrictions may be imposed with respect to particular classes or series of
options or underlying securities; (iv) unusual or unforeseen circumstances may
interrupt normal operations on an exchange; (v) the facilities of an exchange
may not at all times be adequate to handle current trading volume; or (vi) one
or more exchanges could, for economic or other reasons, decide or be compelled
at some future date to discontinue the trading of options (or a particular class
or series of options), in which event the secondary market on that exchange (or
in that class or series of options) would cease to exist, although outstanding
options on that exchange could continue to be exercisable in accordance with
their terms.

There is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain clearing facilities
inadequate, and thereby result in the institution by an exchange of special
procedures which may interfere with the timely execution of customers' orders.

REPURCHASE AGREEMENTS

The Fund's repurchase agreements will be collateralized by U.S. Government
obligations. The Fund will enter into repurchase transactions only with parties
meeting creditworthiness standards approved by the Fund's Trustees. The Fund's
investment

B-8
<PAGE>
adviser will monitor the creditworthiness of such parties, under the general
supervision of the Trustees. In the event of a default or bankruptcy by a
seller, the Fund will promptly seek to liquidate the collateral. To the extent
that the proceeds from any sale of such collateral upon a default in the
obligation to repurchase are less than the repurchase price, the Fund will
suffer a loss.

The Fund participates in a joint repurchase account with other investment
companies managed by Prudential Investments Fund Management LLC (PIFM) pursuant
to an order of the Commission. On a daily basis, any uninvested cash balances of
the Fund may be aggregated with those of such investment companies and invested
in one or more repurchase agreements. Each fund participates in the income
earned or accrued in the joint account based on the percentage of its
investment.

PORTFOLIO TURNOVER

A Series may engage in short-term trading consistent with its investment
objective. Portfolio transactions will be undertaken in response to anticipated
movements in the general level of interest rates. Municipal securities or
futures contracts may be sold in anticipation of a market decline (resulting
from a rise in interest rates) or purchased in anticipation of a market rise
(resulting from a decline in interest rates) and later sold. In addition, a
security may be sold and another purchased at approximately the same time to
take advantage of what the investment adviser believes to be a temporary
disparity in the normal yield relationship between the two securities. Yield
disparities may occur for reasons not directly related to the investment quality
of particular issues or the general movement of interest rates, due to factors
such as changes in the overall demand for or supply of various types of
municipal securities or changes in the investment objectives of investors.

Except as described above and under "Investment Restrictions," the foregoing
investment policies are not fundamental and may be changed by the Trustees of
the Fund without the vote of a majority of its outstanding voting securities.

SEGREGATED ACCOUNTS

When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or other liquid assets in a
segregated account. "Liquid assets" means cash, U.S. Government securities,
foreign securities, equity securities, debt obligations or other liquid,
unencumbered assets marked-to-market daily.

INVESTMENT RESTRICTIONS

The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of a Series' outstanding voting securities. A "majority of the
outstanding voting securities" of a Series, when used in this Statement of
Additional Information, means the lesser of (i) 67% of the voting shares
represented at a meeting at which more than 50% of the outstanding voting shares
are present in person or represented by proxy or (ii) more than 50% of the
outstanding voting shares.

Each Series may not:

1. Purchase securities on margin (but the Series may obtain such short-term
credits as may be necessary for the clearance of transactions and for margin
payments in connection with transactions in financial futures contracts and
options thereon).

2. Make short sales of securities or maintain a short position.

3. Issue senior securities, borrow money or pledge its assets, except that
each Series may borrow up to 33 1/3% of the value of its total assets
(calculated when the loan is made) for temporary, extraordinary or emergency
purposes and to take advantage of investment opportunities or for the clearance
of transactions. The Series may pledge up to 33 1/3% of the value of its total
assets to secure such borrowings. For purposes of this restriction, the
preference as to shares of a Series in liquidation and as to dividends over all
other Series of the Fund with respect to assets specifically allocated to that
Series, the purchase or sale of securities on a when-issued or delayed delivery
basis, the purchase and sale of financial futures contracts and collateral
arrangements with respect thereto and obligations of the Series to Trustees,
pursuant to deferred compensation arrangements, are not deemed to be the
issuance of a senior security or a pledge of assets.

4. Purchase any security if as a result, with respect to 75% of the total
assets of the Series, more than 5% of the total assets of the Series would be
invested in the securities of any one issuer (provided that this restriction
shall not apply to obligations issued or guaranteed as to principal and interest
by the U.S. Government or its agencies or instrumentalities).

5. Purchase securities (other than municipal obligations and obligations
guaranteed as to principal and interest by the U.S. Government or its agencies
or instrumentalities) if, as a result of such purchase, 25% or more of the total
assets of the Series

B-9
<PAGE>
(taken at current market value) would be invested in any one industry. (For
purposes of this restriction, industrial development bonds, where the payment of
the principal and interest is the ultimate responsibility of companies within
the same industry, are grouped together as an "industry.")

6. Buy or sell commodities or commodity contracts, except financial futures
contracts and options thereon.

7. Buy or sell real estate or interests in real estate, although it may
purchase and sell securities which are secured by real estate and securities of
companies which invest or deal in real estate.

8. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.

9. Purchase securities of other investment companies, except in the open
market involving only customary brokerage commissions and as a result of which
no more than 10% of its total assets (determined at the time of investment)
would be invested in such securities or except in connection with a merger,
consolidation, reorganization or acquisition of assets.

10. Invest in interests in oil, gas or other mineral exploration or
development programs.

11. Make loans, except through repurchase agreements and loans of portfolio
securities (limited to 33% of the Series' total assets).

12. Purchase or write puts, calls or combinations thereof except as
described in the Prospectus and this Statement of Additional Information with
respect to puts and options on futures contracts.

13. Invest for the purpose of exercising control or management of another
company.

Whenever any fundamental investment policy or investment restriction states
a maximum percentage of a Series' assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy. However, in the event that a Series'
asset coverage for borrowings falls below 300%, the Series will take prompt
action to reduce its borrowings, as required by applicable law.

TRUSTEES AND OFFICERS

B-10
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
Delayne Dedrick Gold (59) Trustee Marketing and Management Consultant; Director of The High Yield
Income Fund, Inc.
*Robert F. Gunia (51) Trustee Vice President (since January 1996), Prudential Insurance Company
of America (Prudential); Executive Vice President and Treasurer
(since December 1996), Prudential Investments Fund Management LLC
(PIFM); Senior Vice President (since March 1987) of Prudential
Securities Incorporated (Prudential Securities); formerly Chief
Administrative Officer (July 1990-September 1996), Director
(January 1989-September 1996) and Executive Vice President,
Treasurer and Chief Financial Officer (June 1987-December 1996) of
Prudential Mutual Fund Management, Inc. (PMF); Vice President and
Director of The Asia Pacific Fund, Inc. (since May 1989); Director
of The High Yield Income Fund, Inc.
*Harry A. Jacobs, Jr. (76) Trustee Senior Director (since January 1986) of Prudential Securities;
One Seaport Plaza formerly Interim Chairman and Chief Executive Officer of PMF
New York, NY 10292 (June-September 1993); formerly Chairman of the Board of
Prudential Securities (1982-1985) and Chairman of the Board and
Chief Executive Officer of Bache Group Inc. (1977-1982); Trustee
of The Trudeau Institute; Director of The First Australia Fund,
Inc., The First Australia Prime Income Fund, Inc. and The High
Yield Income Fund, Inc.
*Mendel A. Melzer CFA (37) Trustee Chief Investment Officer (since October 1996) of Prudential Mutual
751 Broad Street Funds; formerly Chief Financial Officer of Prudential Investments
Newark, NJ 07102 (November 1995-September 1996), Senior Vice President and Chief
Financial Officer of Prudential Preferred Financial Services
(April 1993-November 1995), Managing Director of Prudential
Investment Advisors (April 1991-April 1993) and Senior Vice
President of Prudential Capital Corporation (July 1989-April
1991); Chairman and Director of Prudential Series Fund, Inc;
Director of The High Yield Income Fund, Inc.
Thomas T. Mooney (56) Trustee President of the Greater Rochester Metro Chamber of Commerce;
former Rochester City Manager; Trustee of Center for Governmental
Research, Inc.; Director of Blue Cross of Rochester, The Business
Council of New York State, Monroe County Water Authority,
Rochester Jobs, Inc., Northeast-Midwest Institute, Executive
Service Corps of Rochester, Monroe County Industrial Development
Corporation and The High Yield Income Fund, Inc.; Director and
Treasurer of First Financial Fund, Inc. and The High Yield Plus
Fund, Inc.
Thomas H. O'Brien (73) Trustee President, O'Brien Associates (financial and management
consultants) (since April 1984); formerly President of Jamaica
Water Securities Corp. (holding company) (February 1989-August
1990); Chairman and Chief Executive Officer (September
1987-February 1989) and Director (September 1987-August 1990) of
Jamaica Water Supply Company; Director and President of Winthrop
Regional Health System and United Presbyterian Home at Syoset
Inc.; Director of Ridgewood Savings Bank and The High Yield Income
Fund; Trustee of Hofstra University.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of his affiliation with Prudential
Securities, Prudential or PIFM.
</TABLE>

B-11
<PAGE>

<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME, ADDRESS AND AGE(1) POSITION WITH FUND DURING PAST FIVE YEARS
- --------------------------- ----------------------- -------------------------------------------------------------------
<S> <C> <C>
*Richard A. Redeker (54) Trustee and President Employee of Prudential Investments; formerly President, Chief
751 Broad Street Executive Officer and Director (October 1993-September 1996), PMF;
Newark, N.J. 07102 Executive Vice President, Director and Member of the Operating
Committee (October 1993-September 1996), Prudential Securities;
Director (October 1993-September 1996) of Prudential Securities
Group, Inc. (PSG); Executive Vice President, The Prudential
Investment Corporation (July 1994-September 1996); Director
(January 1994-September 1996) of Prudential Mutual Fund
Distributors, Inc. (PMFD) and Prudential Mutual Fund Services,
Inc. (PMFS); formerly Senior Executive Vice President and Director
of Kemper Financial Services, Inc. (September 1978-September
1993); Director and President of The High Yield Income Fund, Inc.
Nancy H. Teeters (67) Trustee Economist; formerly Vice President and Chief Economist of
International Business Machines Corporation (March 1986-June
1990); Member of the Board of Governors of the Horace Rackham
School of Graduate Studies at the University of Michigan; Director
of Inland Steel Industries (since July 1991) and The High Yield
Income Fund, Inc.
Louis A. Weil, III (57) Trustee Publisher and Chief Executive Officer (since January 1996) and
Director (since September 1991) of Central Newspapers, Inc.;
Chairman (since January 1996), Publisher and Chief Executive
Officer of Phoenix Newspapers, Inc. (August 1991-December 1995).
Director of Central Newspapers, Inc. (since September 1991),
formerly, Publisher of Time Magazine (May 1989-March 1991);
formerly President, Publisher and Chief Executive Officer of the
Detroit News (February 1986-August 1989); formerly member of the
Advisory Board, Chase Manhattan Bank-Westchester; Director of The
High Yield Income Fund, Inc.
Grace Torres (38) Treasurer and Principal First Vice President (since December 1996) of PIFM; formerly First
Financial and Vice President (March 1994-September 1996), of Prudential Mutual
Accounting Officer Fund Management, Inc.; First Vice President of Prudential
Securities (since March 1994); prior thereto, Vice President (July
1989-March 1994) of Bankers Trust Corporation.
Stephen M. Ungerman (45) Assistant Treasurer Vice President and Tax Director of Prudential Investments (since
March 1996); formerly First Vice President of Prudential Mutual
Fund Management, Inc. (February 1993-March 1996).
S. Jane Rose (52) Secretary Senior Vice President (since December 1996) of PIFM; Senior Vice
President and Senior Counsel of Prudential Securities (since July
1992); formerly Senior Vice President (January 1991-September
1996) and Senior Counsel (June 1987-September 1996) of PMF.
Deborah A. Docs (40) Assistant Secretary Vice President (since December 1996) of PIFM; Vice President and
Associate General Counsel of Prudential Securities; formerly Vice
President and Associate General Counsel (June 1991-September 1996)
of PMF.
<FN>
- ------------------------
* "Interested" Trustee, as defined in the Investment Company Act, by reason of affiliation with Prudential Securities,
Prudential or PIFM.
(1) Unless otherwise noted the address for each of the above persons is c/o: Prudential Investments Fund Management LLC,
Gateway Center Three, 100 Mulberry Street, 9th Floor, Newark, New Jersey 07102-4077.
</TABLE>

Trustees and officers of the Fund are also trustees, directors and officers
of some or all of the other investment companies distributed by Prudential
Securities or Prudential Investment Management Services LLC.

B-12
<PAGE>
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.

The Trustees have adopted a retirement policy which calls for the retirement
of Trustees on December 31 of the year in which they reach the age of 72, except
that retirement is being phased in for Trustees who were age 68 or older as of
December 31, 1993. Under this phase-in provision, Messrs. Beach, Dorsey, Jacobs
and O'Brien are scheduled to retire on December 31, 1999, 1999, 1998 and 1999,
respectively.

Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of Trustees of the Fund who are affiliated persons of the Manager.
The Fund pays each of its Trustees who is not an affiliated person of PIFM or
Prudential Investments annual compensation of $5,500, in addition to certain
out-of-pocket expenses. The amount of annual compensation paid to each Director
may change as a result of the introduction of additional funds upon which the
Director will be asked to serve.

Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of such Trustee's fees which accrue interest at a rate
equivalent to the prevailing rate applicable to 90-day U.S. Treasury Bills at
the beginning of each calendar quarter or, pursuant to an SEC exemptive order,
at the daily rate of return of the Fund. Payment of the interest so accrued is
also deferred and accruals become payable at the option of the Trustee. The
Fund's obligation to make payments of deferred Trustees' fees, together with
interest thereon, is a general obligation of the Fund.

Pursuant to the Management Agreement with the Fund, the Manager pays all
compensation of officers and employees of the Fund as well as the fees and
expenses of all Trustees of the Fund who are affiliated persons of the Manager.

The following table sets forth the aggregate compensation paid by the Fund
to the Trustees who are not affiliated with the Manager for the fiscal year
ended April 30, 1998 and the aggregate compensation paid to such Trustees for
service on the Fund's Board and that of all other funds managed by PIFM (Fund
Complex) for the calendar year ended December 31, 1997.

COMPENSATION TABLE

<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT COMPENSATION FROM
AGGREGATE BENEFITS ACCRUED ESTIMATED ANNUAL FUND AND FUND
COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
NAME OF TRUSTEE FROM FUND EXPENSES RETIREMENT DIRECTORS
- ----------------------------------- ------------ ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $5,500 None N/A $ 135,000(38/63)*
Eugene C. Dorsey, Trustee** $5,500 None N/A $ 70,000(16/43)*
Delayne Dedrick Gold, Trustee $5,500 None N/A $ 135,000(38/63)*
Robert F. Gunia, Trustee and Vice
President+ -- -- -- --
Harry A. Jacobs, Jr., Trustee+ -- -- -- --
Donald D. Lennox, Retired Trustee $4,125 None N/A $ 90,000(26/50)*
Mendel A. Melzer, CFA, Trustee+ -- -- -- --
Thomas T. Mooney, Trustee** $5,500 None N/A $ 115,000(31/64)*
Thomas H. O'Brien, Trustee $5,500 None N/A $ 45,000(11/29)*
Richard A. Redeker, Trustee and
President+ $-- -- -- --
Nancy H. Teeters, Trustee $5,500 None N/A $ 90,000(23/42)*
Louis A. Weil, III, Trustee $5,500 None N/A $ 90,000(26/50)*
</TABLE>

- ------------------------
* Indicates number of funds/portfolios in Fund Complex (including the Fund) to
which aggregate compensation relates.
** Total aggregate compensation from all of the funds in the Fund Complex for
the calendar year ended December 31, 1997, includes amounts deferred at the
election of Directors. Including accrued interest, total compensation
amounted to $87,401 and $143,909 for Eugene C. Dorsey and Thomas T. Mooney,
respectively.
+ Robert F. Gunia, Harry A. Jacobs, Jr., Mendel A. Melzer and Richard A.
Redeker, who are each interested Directors, do not receive compensation from
the Fund or any other fund in the Fund Complex.

As of June 5, 1998, the Trustees and officers of the Fund, as a group, owned
beneficially less than 1% of the outstanding shares of beneficial interest of
the Fund.

As of June 5, 1998, Prudential Securities was record holder for other
beneficial owners of 26,212,432 Class A shares (or 70% of the outstanding Class
A shares) of the High Income Series, 9,239,519 Class A shares (or 46% of the
outstanding Class A shares) of the Insured Series and 684,379 Class A shares (or
57% of the outstanding Class A shares) of the Intermediate Series; 45,635,465
Class B shares (or 77% of the outstanding Class B shares) of the High Income
Series, 7,537,046 Class B shares (or 36% of the outstanding Class B shares) of
the Insured Series and 999,847 Class B shares (or 46% of the outstanding Class B

B-13
<PAGE>
shares) of the Intermediate Series: 1,803,396 Class C shares (or 95% of the
outstanding Class C shares) of the High Income Series, 94,349 Class C shares (or
71% of the outstanding Class C shares) of the Insured Series and 37,776 Class C
shares (or 91% of the outstanding Class C shares) of the Intermediate Series;
and 912,470 Class Z shares (or 99% of the outstanding Class Z shares) of the
High Income Series, 37,245 Class Z shares (or 99% of the outstanding Class Z
shares) of the Insured Series and 120,239 Class Z shares (or 99% of the
outstanding Class Z shares) of the Intermediate Series. In the event of any
meetings of shareholders, Prudential Securities will forward, or cause the
forwarding of, proxy material to the beneficial owners for which it is the
record holder.

As of June 5, 1998, the beneficial owners, directly or indirectly, of more
than 5% of the outstanding shares of any class of beneficial interest of a
Series were: Mr. Stephen J. Charms, 2787 Sulgrave Rd, Beachwood, OH 44122-2343
who held 81,050 Class Z shares of the High Income Series (8.8%); John D. Cooke,
13665 E. 114th St, Fishers, IN 46038-9712 who held 208,915 Class Z shares of the
High Income Series (22.9%); Lance E. Radbill, Ruth M. Radbill, 444 Saint Annes
Dr., Birmingham, AL 35244-3267 who held 14,603 Class C shares of the
Intermediate Series (35.1%); Frank R. Grabenhofer, Loretta M. Grabenhofer JT
TEN, 15606 Plum Tree Dr, Orland Park, IL 60462-5987 who held 3,841 Class C
shares of the Intermediate Series (9.2%); Mr. Ben L. Danna, 6261 Inwood Dr,
Houston, TX 77057-3507 who held 2,459 Class C shares of the Intermediate Series
(5.9%); Ms. Linda Lappin, Marshall Family Trust, UA DTD 4/18/96, 4302 N. Stowell
Ave., Shorewood, WI 53211-1747 who held 8,216 Class Z shares of the Intermediate
Series (22.0%); Mr. James R. McCabe, 60 Loeffler Road, Apt P-210, Bloomfield, CT
06002-2281 who held 4,750 Class C shares of the Intermediate Series (11.4%);
National Door Industries Inc., Bob R. Barnard, Jim Lewis and Mike Barnard TTEES,
6310 Airport FWY, Fort Worth, TX 76117-5322 who held 14,089 Class C shares of
the Intermediate Series (33.8%); Denis N. Maiorani & Lynn H. Maiorani, Jt Ten,
P.O. Box 648, Rye Beach, NH 03871-9648 who held 39,291 Class Z shares of the
Intermediate Series (32.7%); David R. Hopkins, Trustee, David R. Hopkins
Revocable Trust, DTD 4/5/97, P.O. Box Drawer 4345, St. Augustine, FL 32085-4345
who held 7,843 Class C shares of the Insured Series (5.9%);Elizabeth A.
Straubmuller, 1598 Silver Run Rd, Millville, NJ 08332-7334 who held 26,486 Class
C shares of the Insured Series (19.9%); George J. Straubmuller, 1598 Silver Run
Rd., Millville, NJ 08332-7334 who held 8,849 Class C shares of the Insured
Series (6.7%); Jack H. Piehl & Laverne Z. Piehl, JT Ten, 1902 River Falls,
Kingwood, TX 77339-3112 who held 11,546 Class C shares of the Insured Series
(8.7%); Mr. Charles Smith, Jr., 2 Hazelwood Ct., San Antonio, TX 78257-1706 who
held 2,925 Class Z shares of the Insured Series (7.8%); Yekaterina Khalamayzer,
11 Iris Ct., Edison, NJ 08820-4302, who held 2,199 Class Z shares of the Insured
Series (5.9%); Mr. Vincent G. Pavanello & Mrs. Paula L. Pavanello, JT Ten, 5007
Remington Dr., Coopersburg, PA 18036-1376 who held 2,212 Class Z shares of the
Insured Series (5.9%); Mr. Christopher M. Blackstone TTEE, Rev Tr Trust, UA DTD
09/05/95, FBO Christopher M. Blackstone, 905 Augusta Road, Wilmington, DE
19807-2807 who held 8,715 Class Z shares of the Insured Series (23.4%); Mr.
Sarwat Ramadan, 2431 Palisades Crest Dr., Lake Oswego, OR 97034-7551 who held
6,094 Class Z shares of the Insured Series (16.3%); Dr. In-Ho Chang and Mrs.
Eun-Aei Chang, Jt Ten, 4310 Farmington Cir., Allentown, PA 18104-1960 who held
5,166 Class Z shares of the Insured Series (13.9%); and Mr. Eugene E. Poirot,
Mrs. Patricia F. Poirot TEN COM ACCT#2, 130 N Burnet Dr, Baytown, TX 77520-1104
who held 2,279 Class Z shares of the Insured Series (6.1%).

MANAGER

The manager of the Fund is Prudential Investments Fund Management LLC (PIFM
or the Manager), Gateway Center Three, Newark, 100 Mulberry Street, New Jersey
07102-4077. The Manager serves as manager to all of the other open-end
management investment companies that, together with the Fund, comprise the
Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of May 31, 1998, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $66.5
billion and, according to the Investment Company Institute, as of December,
1997, the Prudential Mutual Funds were the 18th largest family of mutual funds
in the United States.

The Manager is a subsidiary of Prudential Securities and Prudential.
Prudential Mutual Fund Services LLC (the Transfer Agent), a wholly owned
subsidiary of the Manager, serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, recordkeeping and
management and administration services to qualified plans.

Pursuant to the Management Agreement with the Fund (the Management
Agreement), the Manager, subject to the supervision of the Fund's Trustees and
in conformity with the stated policies of the Fund, manages both the investment
operations of each Series and the composition of each Series' portfolio,
including the purchase, retention, disposition and loan of securities. In
connection therewith, the Manager is obligated to keep certain books and records
of the Fund. The Manager also administers the Fund's business affairs and, in
connection therewith, furnishes the Fund with office facilities, together with
those ordinary clerical and bookkeeping services which are not being furnished
by State Street Bank and Trust Company, the Fund's custodian, and the Fund's
transfer and dividend disbursing agent. The services of the Manager for the Fund
are not exclusive under the terms of the Management Agreement and the Manager is
free to, and does, render management services to others.

For its services, the Manager receives, pursuant to the Management
Agreement, a fee at an annual rate of .50 of 1% of the average daily net assets
of each Series up to $1 billion and .45 of 1% of the average daily net assets in
excess of $1 billion. PIFM has agreed to waive 10% of its management fee
(approximately .05 of 1% of average net assets, as annualized) with respect to
the

B-14
<PAGE>
High Income Series. The fee is computed daily and payable monthly. The
Management Agreement also provides that, in the event the expenses of the Fund
(including the fees of the Manager, but excluding interest, taxes, brokerage
commissions, distribution fees and litigation and indemnification expenses and
other extraordinary expenses not incurred in the ordinary course of the Fund's
business) for any fiscal year exceed the lowest applicable annual expense
limitation established and enforced pursuant to the statutes or regulations of
any jurisdiction in which the Fund's shares are qualified for offer and sale,
the compensation due the Manager will be reduced by the amount of such excess.
Reductions in excess of the total compensation payable to the Manager will be
paid by the Manager to the Fund. No such reductions were required during the
fiscal year ended April 30, 1998. No jurisdiction currently limits the Fund's
expenses.

In connection with its management of the business affairs of the Fund, the
Manager bears the following expenses:

(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Subadviser;

(b) all expenses incurred by the Manager or by the Fund in connection with
managing the ordinary course of the Fund's business, other than those assumed by
the Fund as described below; and

(c) the costs and expenses payable to the Subadviser pursuant to the
subadvisory agreement between the Manager and the Subadviser (the Subadvisory
Agreement).

Under the terms of the Management Agreement, the Fund is responsible for the
payment of the following expenses: (a) the fees payable to the Manager, (b) the
fees and expenses of Trustees who are not affiliated persons of the Manager or
the Subadviser, (c) the fees and certain expenses of the Custodian and Transfer
Agent, including the cost of providing records to the Manager in connection with
its obligation of maintaining required records of the Fund and of pricing the
Fund's shares, (d) the charges and expenses of legal counsel and independent
accountants for the Fund, (e) brokerage commissions and any issue or transfer
taxes chargeable to the Fund in connection with its securities transactions, (f)
all taxes and corporate fees payable by the Fund to governmental agencies, (g)
the fees of any trade associations of which the Fund may be a member, (h) the
cost of share certificates representing shares of the Fund, (i) the cost of
fidelity and liability insurance, (j) certain organization expenses of the Fund
and the fees and expenses involved in registering and maintaining registration
of the Fund and of its shares with the Commission, and the states under state
securities laws, including the preparation and printing of the Fund's
registration statements and prospectuses for such purposes and paying the fees
and expenses of notice filings made in accordance with state securities laws,
(k) allocable communications expenses with respect to investor services and all
expenses of shareholders' and Trustees' meetings and of preparing, printing and
mailing reports, proxy statements and prospectuses to shareholders in the amount
necessary for distribution to the shareholders, (l) litigation and
indemnification expenses and other extraordinary expenses not incurred in the
ordinary course of the Fund's business and (m) distribution fees.

The Management Agreement provides that the Manager will not be liable for
any error of judgment or for any loss suffered by the Fund in connection with
the matters to which the Management Agreement relates, except a loss resulting
from willful misfeasance, bad faith, gross negligence or reckless disregard of
duty. The Management Agreement provides that it will terminate automatically if
assigned, and that it may be terminated without penalty by either party upon not
more than 60 days' nor less than 30 days' written notice. The Management
Agreement will continue in effect for a period of more than two years from the
date of execution only so long as such continuance is specifically approved at
least annually in conformity with the Investment Company Act. The Management
Agreement was last approved by the Trustees of the Fund, including a majority of
the Trustees who are not parties to such contract or interested persons of such
parties as defined in the Investment Company Act, on May 12, 1998 and by the
shareholders of each Series on February 19, 1988.

For the fiscal year ended April 30, 1998, the Manager received a management
fee of $4,787,451 (net of waiver of $535,931), $2,384,469 (net of waiver of
$85,444) and $200,622 (net of waiver of $7,346) on behalf of the High Income
Series, Insured Series and Intermediate Series, respectively. For the fiscal
year ended April 30, 1997, PIFM received a management fee of $4,614,964 (net of
waiver of $514,371), $2,494,083 (net of waiver of $277,120) and $220,036 (net of
waiver of $24,449) on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively. For the fiscal year ended April 30, 1996,
PIFM received a management fee of $4,774,952 (net of waiver of $534,026),
$2,824,806 (net of waiver of $313,867) and $265,175 (net of waiver of $29,464)
on behalf of the High Income Series, Insured Series and Intermediate Series,
respectively.

The Manager has entered into a Subadvisory Agreement with the Subadviser, a
wholly-owned subsidiary of Prudential. The Subadvisory Agreement provides that
the Subadviser will furnish investment advisory services in connection with the
management of the Fund. In connection therewith, the Subadviser is obligated to
keep certain books and records of the Fund. The Manager continues to have
responsibility for all investment advisory services pursuant to the Management
Agreement and supervises the Subadviser's performance of such services. The
Subadviser is reimbursed by the Manager for the reasonable costs and expenses
incurred by the Subadviser in furnishing those services.

B-15
<PAGE>
Peter J. Allegrini oversees the municipal bond team at PIC. The portfolio
manager analyzes the risks and negotiates credit terms for high yield municipal
bonds to build a well-diversified portfolio of bonds that, in his opinion, have
low prices and good potential to appreciate. Then, the portfolio manager and a
credit team monitor each issuer's ability to pay interest and principal on a
timely basis, under various economic conditions. The portfolio manager seeks to
avoid making short-term gains based on interest rate movements and will shift
maturities to capture good relative returns.

The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such party as defined in the Investment Company Act, on May 12,
1998, and by the shareholders of each Series on February 19, 1988.

The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, the Manager or the Subadviser upon not more than 60
days', nor less than 30 days', written notice. The Subadvisory Agreement
provides that it will continue in effect for a period of more than two years
from its execution only so long as such continuance is specifically approved at
least annually in accordance with the requirements of the Investment Company
Act.

DISTRIBUTOR

Prudential Investment Management Services LLC (the Distributor) Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, acts as the
distributor of the shares of the Fund. Prior to July 1, 1998, Prudential
Securities Incorporated, One Seaport Plaza, New York, New York 10292, served as
the distributor of the shares of the Fund.

Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted by the Fund
under Rule 12b-1 under the Investment Company Act and a distribution agreement
(the Distribution Agreement), the Distributor incurs the expenses of
distributing the Fund's Class A, Class B and Class C shares. The Distributor
incurs the expenses of distributing the Fund's Class Z shares under the
Distribution Agreement, none of which are reimbursed or paid for by the Fund.
See "How the Fund is Managed--Distributor" in the Prospectus.

Prior to January 22, 1990, the Fund offered only one class of shares (the
existing Class B shares). On October 11, 1989, the Trustees, including a
majority of the Trustees who are not interested persons of the Fund and who have
no direct or indirect financial interest in the operation of the Class A or
Class B Plan or in any agreement related to either Plan (the Rule 12b-1
Trustees), at a meeting called for the purpose of voting on each Plan, adopted a
new plan of distribution for the Class A shares of the Fund (the Class A Plan)
and approved an amended and restated plan of distribution with respect to the
Class B shares of the Fund (the Class B Plan). On February 9, 1993, the
Trustees, including a majority of the Rule 12b-1 Trustees, at a meeting called
for the purpose of voting on each Plan, approved the continuance of the Plans
and Distribution Agreements and approved modifications of the Fund's Class A and
Class B Plans and Distribution Agreements to conform them with recent amendments
to the National Association of Securities Dealers, Inc. (NASD) maximum sales
charge rule described below. As so modified, the Class A Plan provides that (i)
up to .25 of 1% of the average daily net assets of the Class A shares may be
used to pay for personal service and the maintenance of shareholder accounts
(service fee) and (ii) total distribution fees (including the service fee of .25
of 1%) may not exceed .30 of 1%. As so modified, the Class B Plan provides that
(i) up to .25 of 1% of the average daily net assets of the Class B shares may be
paid as a service fee and (ii) up to .50 of 1% (including the service fee) of
the average daily net assets of the Class B shares (asset-based sales charge)
may be used as reimbursement for distribution-related expenses with respect to
the Class B shares. On May 4, 1993, the Trustees, including a majority of the
Rule 12b-1Trustees, at a meeting called for the purpose of voting on each Plan,
adopted a plan of distribution for the Class C shares of the Fund and approved
further amendments to the plans of distribution for the Fund's Class A and Class
B shares changing them from reimbursement type plans to compensation type plans.

Prior to July 10, 1998, Prudential Securities Incorporated (Prudential
Securities) acted as the distributor of the shares of the Fund. On May 12, 1998,
the Trustees including a majority of the Rule 12b-1 Trustees at a meeting called
for the purpose of voting on each Plan and the Distribution Agreement, adopted a
new distribution agreement and an amendment to the Class A, Class B and Class C
Plans, effective July 1,1998, under which the responsibility for distribution
was transferred from Prudential Securities to the Distributor. The Class A Plan,
as previously amended, was approved by the Class A and Class B shareholders of
each Series of the Fund and the Class B Plan, as amended, was approved by the
Class B shareholders of each Series on July 19, 1994. The Class C Plan was
approved by the sole shareholder of Class C shares of each Series on August 1,
1994.

B-16
<PAGE>
CLASS A PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received payments of $381,735,
$222,115 and $13,591 on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively, under the Class A Plan. These amounts were
primarily for payment of account servicing fees to financial advisers and other
persons who sell Class A shares. For the fiscal year ended April 30, 1998,
Prudential Securities also received approximately $493,600, $30,300 and $5,300
on behalf of the High Income Series, Insured Series and Intermediate Series,
respectively, in initial sales charges.

CLASS B PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received $3,345,658, $1,352,766 and
$135,876 on behalf of the High Income Series, Insured Series and Intermediate
Series, respectively, under the Class B Plan. For the fiscal year ended April
30, 1998, the Distributor spent approximately the following amounts on behalf of
each Series of the Fund:

<TABLE>
<CAPTION>
COMPENSATION TO APPROXIMATE
COMMISSION PRUSEC FOR TOTAL
PAYMENTS TO COMMISSION AMOUNT
FINANCIAL PAYMENTS TO SPENT BY
ADVISERS OF OVERHEAD COSTS REPRESENTATIVES DISTRIBUTOR
PRUDENTIAL OF PRUDENTIAL AND ON BEHALF OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- ---------------------- ---------------- -------------- --------------- ------------------ -------------
<S> <C> <C> <C> <C> <C>
High Income Series $ 23,669 $ 2,746,150 $2,385,880 $ 323,123 $ 5,478,822
Insured Series $ 922 $ 453,815 $ 102,771 $ 187,016 $ 744,524
Intermediate Series $ 105 $ 57,489 $ 22,453 $ 6,470 $ 86,517
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>

The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class B shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received approximately $866,900,
$388,200 and $65,600 on behalf of the High Income Series, Insured Series and
Intermediate Series, respectively, in contingent deferred sales charges
attributable to Class B shares.

CLASS C PLAN. For the fiscal year ended April 30, 1998, Prudential
Securities received $111,993, $8,567 and $2,856 on behalf of the High Income
Series, Insured Series and Intermediate Series, respectively, under the Class C
Plan. For the fiscal year ended April 30, 1998, Prudential Securities spent
approximately the following amounts on behalf of each Series of the Fund.

<TABLE>
<CAPTION>
APPROXIMATE
TOTAL
COMMISSION COMPENSATION TO AMOUNT
PAYMENTS TO PRUSEC FOR SPENT BY
FINANCIAL COMMISSION DISTRIBUTOR
ADVISERS OF OVERHEAD COSTS PAYMENTS TO ON BEHALF
PRUDENTIAL OF PRUDENTIAL REPRESENTATIVES AND OF
SERIES PRINTING SECURITIES SECURITIES* OTHER EXPENSES* SERIES
- -------------------- --------- ----------- -------------- ------------------- -----------
<S> <C> <C> <C> <C> <C>
High Income Series $ 2,729 $94,465 $53,545 $3,829 $154,568
Insured Series $ 12 $ 7,956 $ 3,262 $ 691 $ 11,921
Intermediate Series $ 0 $ 2,189 $ 1,650 $ 0 $ 3,839
- ------------------------
* Including lease, utility and sales promotion expenses.
</TABLE>

The Distributor also receives the proceeds of contingent deferred sales
charges paid by shareholders upon certain redemptions of Class C shares. See
"Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales Charges"
in the Prospectus. For the fiscal year ended April 30, 1998, Prudential
Securities, as the predecessor distributor, received approximately $11,600 and
$600 on behalf of the High Income Series and Intermediate Series, respectively,
in contingent deferred sales charges attributable to Class C shares and did not
receive any contingent deferred sales charges with respect to the Insured
Series.

The Class A, Class B and Class C Plans continue in effect from year to year,
provided that each such continuance is approved at least annually by a vote of
the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast in
person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the applicable class on not more than 30 days'
written notice to any other party to the Plans. The Plans may not be amended to
increase materially the amounts to be spent for the services described therein
without approval by the shareholders of the applicable class (by both Class A
and Class B shareholders, voting separately, in the case of material amendments
to the Class A Plan) and all material

B-17
<PAGE>
amendments are required to be approved by the Trustees in the manner described
above. Each Plan will automatically terminate in the event of its assignment.
The Fund will not be contractually obligated to pay expenses incurred under any
Plan if it is terminated or not continued.

Pursuant to each Plan, the Trustees will review at least quarterly a written
report of the distribution expenses incurred on behalf of each class of shares
of the Fund by the Distributor. The report will include an itemization of the
distribution expenses and the purposes of such expenditures. In addition, as
long as the Plans remain in effect, the selection and nomination of Rule 12b-1
Trustees shall be committed to the Rule 12b-1 Trustees.

Pursuant to the Distribution Agreement, the Fund has agreed to indemnify the
Distributor to the extent permitted by applicable law against certain
liabilities under federal securities laws. The Distribution Agreement was
approved by the Trustees, including a majority of the Rule 12b-1 Trustees, on
May 12, 1998.

NASD MAXIMUM SALES CHARGE RULE. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not included in
the calculation of the 6.25% limitation. The annual asset-based sales charge on
shares of a Series may not exceed .75 of 1% per class. The 6.25% limitation
applies to each class of each Series of the Fund rather than on a per
shareholder basis. If aggregate sales charges were to exceed 6.25% of total
gross sales of any class, all sales charges on shares of that class would be
suspended.

PORTFOLIO TRANSACTIONS AND BROKERAGE

The Manager is responsible for decisions to buy and sell securities and
financial futures for each Series of the Fund, the selection of brokers, dealers
and futures commission merchants to effect the transactions and the negotiation
of brokerage commissions, if any. The term "Manager" as used in this section
includes the Subadviser. Purchases and sales of securities on a securities
exchange, which are not expected to be a significant portion of the portfolio
securities of any Series, are effected through brokers who charge a commission
for their services. Orders may be directed to any broker or futures commission
merchant including, to the extent and in the manner permitted by applicable law,
the Distributor and its affiliates. Brokerage commissions on United States
securities, options and futures exchanges or boards of trade are subject to
negotiation between the Manager and the broker or futures commission merchant.

In the over-the-counter market, securities are generally traded on a "net"
basis with dealers acting as principal for their own accounts without a stated
commission, although the price of the security usually includes a profit to the
dealer. In underwritten offerings, securities are purchased at a fixed price
which includes an amount of compensation to the underwriter, generally referred
to as the underwriter's concession or discount. On occasion, certain money
market instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not deal with the Distributor
or an affiliate in any transaction in which the Distributor or an affiliate acts
as principal. Thus it will not deal in over-the-counter securities with the
Distributor or an affiliate acting as a market-maker, and it will not execute a
negotiated trade with the Distributor or an affiliate if the execution involves
the Distributor or an affiliate acting as principal with respect to any part of
the Fund's order.

In placing orders for portfolio securities for the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. Within the framework of this policy, the Manager will
consider the research and investment services provided by brokers, dealers or
futures commission merchants who effect or are parties to portfolio transactions
of the Fund, the Manager or the Manager's other clients. These research and
investment services are those which brokerage houses customarily provide to
institutional investors and include statistical and economic data and research
reports on particular companies and industries. These services are used by the
Manager in connection with all of its investment activities, and some of these
services obtained in connection with the execution of transactions for the Fund
may be used in managing other investment accounts. Conversely, brokers, dealers
or futures commission merchants furnishing these services may be selected for
the execution of transactions of these other accounts, whose aggregate assets
may be far larger than the Fund, and the services furnished by the brokers,
dealers or futures commission merchants may be used by the Manager in providing
investment management for the Fund. Commission rates are established pursuant to
negotiations with the broker, dealer or futures commission merchant based on the
quality and quantity of execution services provided by the broker in the light
of generally prevailing rates. The policy of the Manager is to pay higher
commissions to brokers, other than the Distributor or an affiliate, for
particular transactions than might be charged if a different broker had been
selected, on occasions when, in the Manager's opinion, this policy furthers the
objective of obtaining best price and execution. In addition, the Manager is
authorized to pay higher commissions on brokerage transactions for the Fund to
brokers other than the Distributor or an affiliate in order to secure research
and investment services described above, subject to review by the Fund's
Trustees from time to time as to the extent and

B-18
<PAGE>
continuation of this practice. The allocation of orders among brokers and the
commission rates paid are reviewed periodically by the Fund's Trustees.
Portfolio securities may not be purchased from any underwriting or selling
syndicate of which the Distributor (or any affiliate), during the existence of
the syndicate, is a principal underwriter (as defined in the Investment Company
Act), except in accordance with rules of the Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Series ability to pursue
their present investment objectives. However, in the future in other
circumstances, the Series may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations.

Subject to the above considerations, the Distributor or an affiliate may act
as a securities broker or futures commission merchant for the Fund. In order for
the Distributor or an affiliate to effect any portfolio transactions for the
Fund, the commissions, fees or other remuneration received by the Distributor or
an affiliate must not exceed certain rates set forth in the Investment Company
Act and must be reasonable and fair compared to the commissions, fees or other
remuneration paid to other brokers or futures commission merchants in connection
with comparable transactions involving similar securities or futures being
purchased or sold on an exchange during a comparable period of time. This
standard would allow the Distributor or an affiliate to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker or
futures commission merchant in a commensurate arm's-length transaction.
Furthermore, the Trustees of the Fund, including a majority of the
non-interested Trustees, have adopted procedures which are reasonably designed
to provide that any commissions, fees or other remuneration paid to the
Distributor or an affiliate are consistent with the foregoing standard. In
accordance with Section 11(a) of the Securities Exchange Act of 1934, the
Distributor or an affiliate may not retain compensation for effecting
transactions on a national securities exchange for the Fund unless the Fund has
expressly authorized the retention of such compensation. The Distributor and its
affiliates must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by the Distributor and its
affiliates from transactions effected for the Fund during the applicable period.
Brokerage and futures transactions with the Distributor or an affiliate are also
subject to such fiduciary standards as may be imposed upon the Distributor (or
such affiliate) by applicable law.

During the fiscal years ended April 30, 1998, 1997 and 1996 the Fund paid
$136,400, $163,500 and $263,800, respectively, in brokerage commissions on
certain options and/or futures transactions. No such brokerage commissions were
paid to the Distributor or any affiliate thereof.

PURCHASE AND REDEMPTION OF FUND SHARES

Shares of each Series of the Fund may be purchased at a price equal to the
next determined net asset value per share (NAV) plus a sales charge which, at
the election of the investor, may be imposed either (i) at the time of purchase
(Class A shares) or (ii) on a deferred basis (Class B or Class C shares). Class
Z shares of the Fund are offered to a limited group of investors at NAV without
any sales charges. See "Shareholder Guide--How to Buy Shares of the Fund" in the
Prospectus.

Each class of shares represents an interest in the same portfolio of
investments of the Fund and has the same rights, except that (i) each class is
subject to different sales charges and distribution and/or service fees (except
for Class Z shares, which are not subject to any sales charges and distribution
and/or service fees), which may affect performance, (ii) each class has
exclusive voting rights with respect to any matter submitted to shareholders
that relates solely to its arrangement and has separate voting rights on any
matter submitted to shareholders in which the interests of one class differ from
the interests of any other class, (iii) each class has a different exchange
privilege, (iv) only Class B shares have a conversion feature and (v) Class Z
shares are offered exclusively for sale to a limited group of investors. See
"Distributor" and "Shareholder Investment Account--Exchange Privilege."

ISSUANCE OF FUND SHARES FOR SECURITIES

Transactions involving the issuance of Fund shares for securities (rather
than cash) will be limited to (i) reorganizations, (ii) statutory mergers, or
(iii) other acquisitions of portfolio securities that: (a) meet the investment
objectives and policies of the Fund, (b) are liquid and not subject to
restrictions on resale, (c) have a value that is readily ascertainable via
listing on or trading in a recognized United States or international exchange or
market, and (d) are approved by the Fund's investment adviser.

B-19
<PAGE>
SPECIMEN PRICE MAKE-UP

Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* Class C* and Class Z shares are sold at NAV. Using the Fund's NAV at April
30, 1998, the maximum offering price of the Fund's shares is as follows:

<TABLE>
<CAPTION>
HIGH
INCOME INSURED INTERMEDIATE
CLASS A SERIES SERIES SERIES
---------- ------- -------------
<S> <C> <C> <C>
Net asset value and redemption price per
Class A share.............................. $11.31 $ 11.05 $10.81
Maximum sales charge (3% of offering
price)..................................... .35 .34 .33
---------- ------- ------
Offering price to public..................... $11.66 $ 11.39 $11.14
---------- ------- ------
---------- ------- ------
CLASS B
Net asset value, redemption price and
offering price to public per Class B
share*..................................... $11.31 $ 11.06 $10.81
---------- ------- ------
---------- ------- ------
CLASS C
Net asset value, redemption price and
offering price to public per Class C
share*..................................... $11.31 $ 11.06 $10.81
---------- ------- ------
---------- ------- ------
CLASS Z
Net asset value, offering price and
redemption price per Class Z share......... $11.30 $ 11.05 $10.81
---------- ------- ------
---------- ------- ------
</TABLE>

- ------------------------
* Class B and Class C shares are subject to a contingent deferred sales charge
on certain redemptions. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus.

REDUCTION AND WAIVER OF INITIAL SALES CHARGES--CLASS A SHARES

COMBINED PURCHASE AND CUMULATIVE PURCHASE PRIVILEGE. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with Class A shares of other series of the Fund or other Prudential
Mutual Funds, the purchases may be combined to take advantage of the reduced
sales charge applicable to larger purchases. See the table of breakpoints under
"Shareholder Guide--Alternative Purchase Plan" in the Prospectus.

An eligible group of related Fund investors includes any combination of the
following:

(a) an individual;

(b) the individual's spouse, their children and their parents;

(d) any company controlled by the individual (a person, entity or group that
holds 25% or more of the outstanding voting securities of a corporation will be
deemed to control the corporation, and a partnership will be deemed to be
controlled by each of its general partners);

(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;

(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and

(g) one or more employee benefit plans of a company controlled by an
individual.

In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more retirement or group
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).

The Transfer Agent, the Distributor or your Dealer must be notified at the
time of purchase that the investor is entitled to a reduced sales charge. The
reduced sales charges will be granted subject to confirmation of the investor's
holdings. The Combined Purchase and Cumulative Purchase Privilege does not apply
to individual participants in any retirement or group plans.

RIGHTS OF ACCUMULATION. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of shares of the
Fund and shares of other Prudential Mutual Funds (excluding money market funds
other than those acquired pursuant to the exchange privilege) to determine the
reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through the Distributor or a Dealer will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through the Distributor or a Dealer. The

B-20
<PAGE>
value of existing holdings for purposes of determining the reduced sales charge
is calculated using the maximum offering price (net asset value plus maximum
sales charge) as of the previous business day. See "How the Fund Values its
Shares" in the Prospectus.

The Distributor or the Transfer Agent must be notified at the time of
purchase that the shareholder is entitled to a reduced sales charge. The reduced
sales charges will be granted subject to confirmation of the investors'
holdings. Rights of accumulation are not available to individual participants in
any retirement or group plans.

LETTER OF INTENT. Reduced sales charges are available to investors (or an
eligible group of related investors) who enter into a written Letter of Intent
providing for the purchase, within a thirteen-month period, of shares of a
Series of the Fund and shares of other Prudential Mutual Funds (Investment
Letter of Intent). Retirement and group plans may also qualify to purchase Class
A shares at NAV by entering into a Letter of Intent whereby they agree to enroll
within a thirteen-month period, a specified number of eligible employees or
participants (Participant Letter of Intent).

For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
and through the Distributor or a Dealer will not be aggregated to determine the
reduced sales charge.

A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period, in the case of an Investment Letter of Intent, will receive the reduced
sales charge applicable to the amount represented by the goal, as if it were a
single investment. In the case of a Participant Letter of Intent, each
investment made during the period will be made at net asset value. Escrowed
Class A shares totaling 5% of the dollar amount of the Letter of Intent will be
held by the Transfer Agent in the name of the purchaser. The effective date of
an Investment Letter of Intent (except in the case of retirement and group
plans) may be back-dated up to 90 days, in order that any investments made
during this 90-day period, valued at the purchaser's cost, can be applied to the
fulfillment of the Letter of Intent goal.

The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. In the event the Letter of Intent
goal is not achieved within the thirteen-month period, the purchaser (or the
employer or plan sponsor in the case of any retirement or group plan) is
required to pay the difference between the sales charge otherwise applicable to
the purchases made during this period and the sales charge actually paid. Such
payment may be made directly to the Distributor or, if not paid, the Distributor
will liquidate sufficient escrowed shares to obtain such difference. Investors
electing to purchase Class A shares of the Fund pursuant to a Letter of Intent
should carefully read such Letter of Intent.

The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to individual
participants in any retirement or group plans.

WAIVER OF THE CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES

The contingent deferred sales charge (CDSC) is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.

<TABLE>
<S> <C>
CATEGORY OF WAIVER REQUIRED DOCUMENTATION
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.

Disability - An individual will be considered A copy of the Social Security Administration
disabled if he or she is unable to engage in award letter or a letter from a physician on
any substantial gainful activity by reason of the physician's letterhead stating that the
any medically determinable physical or mental shareholder (or, in the case of a trust, the
impairment which can be expected to result in grantor) is permanently disabled. The letter
death or to be of long-continued and must also indicate the date of disability.
indefinite duration.

The Transfer Agent reserves the right to request such additional documents as it may
deem appropriate.
</TABLE>

B-21
<PAGE>
QUANTITY DISCOUNT--CLASS B SHARES PURCHASED PRIOR TO AUGUST 1, 1994

The CDSC is reduced on redemptions of Class B shares of the Fund purchased
prior to August 1, 1994 if immediately after a purchase of such shares, the
aggregate cost of all Class B shares of a Series of the Fund owned by you in a
single account exceeded $500,000. For example, if you purchased $100,000 of
Class B shares of the Fund and the following year purchased an additional
$450,000 of Class B shares with the result that the aggregate cost of your Class
B shares of the Fund following the second purchase was $550,000, the quantity
discount would be available for the second purchase of $450,000 but not for the
first purchase of $100,000. The quantity discount will be imposed at the
following rates depending on whether the aggregate value exceeded $500,000 or $1
million:

<TABLE>
<CAPTION>
CONTINGENT DEFERRED SALES CHARGE AS A
PERCENTAGE OF DOLLARS INVESTED OR
REDEMPTION PROCEEDS
----------------------------------------
YEAR SINCE PURCHASE PAYMENT MADE $500,001 TO $1 MILLION OVER $1 MILLION
- --------------------------------------------- ---------------------- ---------------
<S> <C> <C>
First........................................ 3.0% 2.0%
Second....................................... 2.0% 1.0%
Third........................................ 1.0% 0%
Fourth and thereafter........................ 0% 0%
</TABLE>

You must notify the Fund's Transfer Agent either directly or through the
Distributor, Prudential Securities, Prusec, or your Dealer, at the time of
redemption, that you are entitled to the reduced CDSC. The reduced CDSC will be
granted subject to confirmation of your holdings.

SHAREHOLDER INVESTMENT ACCOUNT

Upon the initial purchase of Fund shares, a Shareholder Investment Account
is established for each investor under which the shares are held for the
investor by the Transfer Agent. If a share certificate is desired, it must be
requested in writing for each transaction. Certificates are issued only for full
shares and may be redeposited in the Account at any time. There is no charge to
the investor for issuance of a certificate. The Fund makes available to its
shareholders the following privileges and plans.

AUTOMATIC REINVESTMENT OF DIVIDENDS AND DISTRIBUTIONS

For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund. An investor
may direct the Transfer Agent in writing not less than five full business days
prior to the record date to have subsequent dividends and/or distributions sent
in cash rather than reinvested. In the case of recently purchased shares for
which registration instructions have not been received on the record date, cash
payment will be made directly to the Dealer. Any shareholder who receives a cash
payment representing a dividend or distribution may reinvest such dividend or
distribution at NAV by returning the check or the proceeds to the Transfer Agent
within 30 days after the payment date. Such investment will be made at the NAV
next determined after receipt of the check or proceeds by the Transfer Agent.
Such shareholder will receive credit for any CDSC paid in connection with the
amount of proceeds being reinvested.

EXCHANGE PRIVILEGE

The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of the relative NAV next determined after receipt of an order
in proper form. An exchange will be treated as a redemption and purchase for tax
purposes. Shares may be exchanged for shares of another fund only if shares of
such fund may legally be sold under applicable state laws.

It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.

CLASS A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds, shares of Prudential
Government Securities Trust (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who acquired such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange privilege.

B-22
<PAGE>
The following money market funds participate in the Class A exchange
privilege:

Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)(Class A shares)
(U.S. Treasury Money Market Series)(Class A shares)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.

CLASS B AND CLASS C. Shareholders of the Fund may exchange their Class B and
Class C shares for Class B and Class C shares, respectively, of certain other
Prudential Mutual Funds and shares of Prudential Special Money Market Fund,
Inc., a money market fund. No CDSC will be payable upon such exchange, but a
CDSC may be payable upon the redemption of the Class B and Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the first day of the month after the initial purchase,
rather than the date of the exchange.

Class B and Class C shares of the Fund may also be exchanged for shares of
Prudential Special Money Market Fund, Inc. without imposition of any CDSC at the
time of exchange. Upon subsequent redemption from such money market fund or
after re-exchange into the Fund, such shares will be subject to the CDSC
calculated by excluding the time such shares were held in the money market fund.
In order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period. For purposes of calculating the seven year holding
period applicable to the Class B conversion feature, the time period during
which Class B shares were held in a money market fund will be excluded.

At any time after acquiring shares of other funds participating in the Class
B or Class C Exchange Privilege, a shareholder may again exchange those shares
(and any reinvested dividends and distributions) for Class B or Class C shares
of the Fund, respectively, without subjecting such shares to any CDSC. Shares of
any fund participating in the Class B or Class C exchange privilege that were
acquired through reinvestment of dividends or distributions may be exchanged for
Class B or Class C shares, respectively, of other funds without being subject to
any CDSC.

CLASS Z Class Z shares may be exchanged for Class Z shares of other
Prudential Mutual Funds.

Additional details about the exchange privilege and prospectuses for each of
the Prudential Mutual Funds are available from the Transfer Agent, the
Distributor or your Dealer. The exchange privilege may be modified, terminated
or suspended on sixty days' notice and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.

DOLLAR COST AVERAGING

Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The average cost
per share is lower than it would be if a constant number of shares were bought
at set intervals.

Dollar cost averaging may be used, for example, to plan for retirement, to
save for a major expenditure, such as the purchase of a home, or to finance a
college education. The cost of a year's education at a four-year college today
averages around $14,000

B-23
<PAGE>
at a private college and around $6,000 at a public university. Assuming these
costs increase at a rate of 7% a year, as has been projected, for the freshman
class beginning in 2011, the cost of four years at a private college could reach
$210,000 and over $90,000 at a public university.(1)

The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)

<TABLE>
<CAPTION>
PERIOD OF
MONTHLY INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- -------------------------------------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 years.............................. $ 110 $ 165 $ 220 $ 275
20 years.............................. 176 264 352 440
15 years.............................. 296 444 592 740
10 years.............................. 555 833 1,110 1,388
5 years.............................. 1,371 2,057 2,742 3,428
See "Automatic Savings Accumulation Plan (ASAP)" below.
- ------------------------------
(1)Source information concerning the costs of education at public and
private universities is available from The College Board Annual Survey of
Colleges, 1993. Average costs for private institutions include tuition, fees and
room and board for the 1993-1994 academic year.
(2)The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not intended
to reflect the performance of an investment in shares of the Fund. The
investment return and principal value of an investment will fluctuate so that an
investor's shares when redeemed may be worth more or less than their original
cost.
</TABLE>

AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP)

Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of a Series of the Fund monthly by authorizing his or her
bank account or Prudential Securities account (including a Command Account) to
be debited to invest specified dollar amounts in shares of the Fund. The
investor's bank must be a member of the Automatic Clearing House System. Share
certificates are not issued to ASAP participants.

Further information about this program and an application form can be
obtained from the Transfer Agent, the Distributor or your Dealer.

SYSTEMATIC WITHDRAWAL PLAN

A systematic withdrawal plan is available to shareholders through the
Transfer Agent, the Distributor or your Dealer. Such withdrawal plan provides
for monthly or quarterly checks in any amount, except as provided below, up to
the value of the shares in the shareholder's account. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See "Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges" in the Prospectus.

In the case of shares held through the Transfer Agent (i) a $10,000 minimum
account value applies, (ii) withdrawals may not be for less than $100 and (iii)
the shareholder must elect to have all dividends and/or distributions
automatically reinvested in additional full and fractional shares at NAV on
shares held under this plan. See "Automatic Reinvestment of Dividends and/or
Distributions" above.

The Distributor and the Transfer Agent act as agents for the shareholder in
redeeming sufficient full and fractional shares to provide the amount of the
periodic withdrawal payment. The systematic withdrawal plan may be terminated at
any time, and the Distributor reserves the right to initiate a fee of up to $5
per withdrawal, upon 30 days' written notice to the shareholder.

Withdrawal payments should not be considered as dividends, yield or income.
If periodic withdrawals continuously exceed reinvested dividends and
distributions, the shareholder's original investment will be correspondingly
reduced and ultimately exhausted.

Furthermore, each withdrawal constitutes a redemption of shares, and any
gain or loss realized must be recognized for federal income tax purposes. In
addition, withdrawals made concurrently with purchases of additional shares are
inadvisable because of the sales charge applicable to (i) the purchase of Class
A shares and (ii) the withdrawal of Class B and Class C shares. Each shareholder
should consult his or her own tax adviser with regard to the tax consequences of
the systematic withdrawal plan, particularly if used in connection with a
retirement plan.

B-24
<PAGE>
MUTUAL FUND PROGRAM

From time to time, the Fund may be included in a mutual fund program with
other Prudential Mutual Funds. Under such a program, a group of portfolios will
be selected and thereafter marketed collectively. Typically, these programs are
marketed with an investment theme, E.G., to seek greater diversification,
protection from interest rate movements or access to different management
styles. In the event such a program is instituted, there may be a minimum
investment requirement for the program as a whole. The Fund may waive or reduce
the minimum initial investment requirements in connection with such a program.

The mutual funds in the program may be purchased individually or as a part
of a program. Since the allocation of portfolios included in the program may not
be appropriate for all investors, investors should consult their Prudential
Securities Financial Adviser, Prudential/Pruco Securities Representative, or
other Dealer concerning the appropriate blends of portfolios for them. If
investors elect to purchase the individual mutual funds that constitute the
program in an investment ratio different from that offered by the program, the
standard minimum investment requirements for the individual mutual funds will
apply.

NET ASSET VALUE

The NAV is the net worth of a Series (assets, including securities at value,
minus liabilities) divided by the number of shares outstanding. NAV is
calculated separately for each class. Under the Investment Company Act, the
Trustees are responsible for determining in good faith the fair value of
securities of each Series of the Fund. The Trustees have fixed the specific time
of day for the computation of each Series' NAV to be at 4:15 P.M., New York
time. In the event the New York Stock Exchange closes early on any business day,
the NAV of the Series' shares shall be determined at a time between such closing
and 4:15 P.M., New York time.

Portfolio securities for which market quotations are readily available are
valued at their bid quotations. Futures contracts are valued daily at 4:15 P.M.,
New York time, at market quotations provided by the Chicago Board of Trade.
Under the Investment Company Act, the Trustees are responsible for determining
in good faith the fair value of securities and other assets of the Fund for
which market quotations are not readily available. Securities for which market
quotations are not readily available are valued at fair value in accordance with
procedures adopted by the Trustees. Under these procedures, the Manager values
municipal securities on the basis of valuations provided by a pricing service
which uses information with respect to transactions in securities, quotations
from bond dealers, market transactions in comparable securities and various
relationships between securities in determining value. This service is furnished
by Kenny-S&P, a division of J.J. Kenny Information Systems. Reliable market
quotations generally are not readily available for purposes of valuing municipal
securities. As a result, depending on the particular municipal securities owned
by the Fund, it is likely that most of the valuations for such securities will
be based upon fair value determined under the foregoing procedures. Short-term
investments are valued at amortized cost if their original term to maturity was
less than 60 days, or by amortizing their value on the 61st day prior to
maturity if their original term to maturity when acquired by the Fund was more
than 60 days, unless this valuation is determined not to represent fair value by
the Trustees.

NAV is calculated separately for each class. As long as long as the Series
declare dividends daily, the NAV of the Class A, Class B, Class C and Class Z
shares will generally be the same. Series' dividends will differ by
approximately the amount any distribution and/or service fee expense accrual
differential among the classes.

TAXES, DIVIDENDS AND DISTRIBUTIONS

Each Series of the Fund has elected to qualify and intends to remain
qualified to be treated as a regulated investment company under Subchapter M of
the Internal Revenue Code. In general, such election relieves each Series (but
not its shareholders) from paying federal income tax on income which is
distributed to shareholders, and permits net capital gains of the Series (I.E.,
the excess of net capital gains from the sale of assets held for more than 12
months over net short-term capital losses) to be treated as long-term capital
gains of the shareholders, regardless of how long shares in the Series are held.

Subchapter M permits the character of tax-exempt interest distributed by a
regulated investment company to flow through as tax-exempt interest to its
shareholders provided that 50% or more of the value of its assets at the end of
each quarter of its taxable year is invested in state, municipal or other
obligations the interest on which is exempt for federal income tax purposes.
Distributions to shareholders of tax-exempt interest earned by any Series of the
Fund for the taxable year are generally not subject to federal income tax (see
the discussion of the alternative minimum tax below). Distributions of taxable
net investment income (including market discount on municipal obligations) and
of the excess of net short-term capital gain over net long-term capital loss are
taxable to shareholders as ordinary income.

The federal alternative minimum tax may affect corporations and other
shareholders in the Fund. Interest on certain categories of tax-exempt
obligations (I.E., most private activity bonds issued after August 7, 1986) will
constitute a preference item for purposes of the alternative minimum tax. Each
Series has invested in such obligations and, therefore, receives interest

B-25
<PAGE>
that will be treated as a preference item. Preference items received by a Series
will be allocated between the Series and its shareholders. It is possible that a
Series will incur some liability under the alternative minimum tax to the extent
preference items are allocated to it. Corporate shareholders in any of the
Series will also have to take into account interest on all municipal obligations
for purposes of the adjustment for current earnings for alternative minimum tax
purposes.

The alternative minimum tax is a tax equal to 20% of a corporation's
so-called alternative minimum taxable income and 26% of a non-corporate
taxpayer's so-called alternative minimum taxable income up to $175,000 and 28%
of such income in excess of $175,000. Individual taxpayers may reduce their
alternative minimum taxable income by a standard exemption amount of $45,000
($33,750 if filing singly), although the exemption amount is reduced for
taxpayers with adjusted gross incomes of more than $150,000 ($112,500 if filing
singly). Alternative minimum taxable income is determined by adding to the
taxpayer's regularly-computed taxable income items of tax preference and certain
other adjustments. All shareholders should consult their tax advisers to
determine whether their investment in the Fund will cause them to incur
liability for the alternative minimum tax.

Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the annual gross income of each Series (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities or options thereof or
foreign currencies, or other income (including but not limited to gains from
options, futures, or forward contracts) derived with respect to its business of
investing in such securities or currencies; (b) each Series diversify its
holdings so that, at the end of each quarter of the taxable year, (i) at least
50% of the value of the assets of the Series is represented by cash, U.S.
Government securities and other securities limited in respect of any one issuer
to an amount not greater than 5% of the market value of the assets of the Series
and 10% of the outstanding voting securities of the issuer, and (ii) not more
than 25% of the value of the assets of the Series is invested in the securities
of any one issuer (other than U.S. Government securities); and (c) each Series
distribute to its shareholders at least 90% of each of (i) its net tax-exempt
interest income and (ii) its net investment income and net short-term gains
(I.E., the excess of net short-term capital gains over net long-term capital
losses) in each year.

Qualification as a regulated investment company will be determined at the
level of each Series and not at the level of the Fund. Accordingly, the
determination of whether any particular Series qualifies as a regulated
investment company will be based on the activities of that Series, including the
purchases and sales of securities and the income received and expenses incurred
in that Series. Net capital gains of a Series which are available for
distribution to shareholders will be computed by taking into account any capital
loss carryforward of the Series.

The High Income Series has a net capital loss carryforward as of April 30,
1998 of approximately $17,547,000 of which $2,024,000 expires in 2002,
$5,361,000 expires 2003, $6,383,000 expires in 2004, and $3,225,000 expires in
2005, and $554,000 expires in 2006. No capital gains distribution is expected to
be paid to shareholders until net gains have been realized in excess of the
aggregate of such amounts. In addition, the High Income Series elected to treat
net realized capital losses of approximately $6,709,700 incurred in the year
ended April 30, 1998, as having been incurred in the following year.

Each Series may purchase debt securities (such as zero coupon bonds) that
contain original issue discount. Original issue discount that accrues in a
taxable year is treated as income earned by the Series and therefore is subject
to the distribution requirements of the Internal Revenue Code. Because the
original issue discount income earned by the Series in a taxable year may not be
represented by cash income, the Series may have to dispose of other securities
and use the proceeds to make distributions to satisfy the Internal Revenue
Code's distribution requirements.

Special rules will apply to futures contracts and options thereon in which
the Series invest. See "Investment Objectives and Policies." These investments
will generally constitute "Section 1256 contracts" and will be required to be
"marked to market" for federal income tax purposes at the end of each Series'
taxable year; that is, treated as having been sold at market value. Sixty
percent of any gain or loss recognized on such "deemed sales" and on actual
dispositions will be treated as long-term capital gain or loss, and the
remainder will be treated as short-term capital gain or loss.

Distributions of net capital gains are taxable to shareholders as long-term
capital gains, regardless of the length of time the shares of the Series have
been held by the shareholders.

If any net capital gains are retained by a Series for investment, requiring
federal income taxes to be paid thereon by the Series, the Series will elect to
treat these capital gains as having been distributed to shareholders. As a
result, these amounts will be taxed to shareholders as capital gains, and
shareholders will be able to claim their proportionate share of the federal
income taxes paid by the Series on the gains as a credit against their own
federal income tax liabilities and will be entitled to increase the adjusted tax
basis of their shares in that Series by the difference between their PRO RATA
share of such gains and their tax credit.

B-26
<PAGE>
Distributions of taxable net investment income and net capital gains will be
taxable as described above, whether made in shares or in cash. Shareholders
electing to receive distributions in the form of additional shares will have a
cost basis for federal income tax purposes in each share so received equal to
the NAV of a share of the applicable Series of the Fund on the distribution
date.

Any loss realized on a sale, redemption or exchange of shares of the Fund by
a shareholder will be disallowed to the extent the shares are replaced within a
61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.

Any short-term capital loss realized upon the sale or redemption of shares
within six months (or such shorter period as may be established by Treasury
regulations) from the date of purchase of such shares and following receipt of
an exempt-interest dividend will be disallowed to the extent of such tax-exempt
dividend. Any loss realized upon the redemption of shares within 6 months from
the date of purchase of the shares and following receipt of a capital gain
distribution from the sale of assets held more than 12 months will be treated as
long-term capital loss to the extent of the capital gain distribution.

Interest on indebtedness and other expenses incurred by shareholders to
purchase or carry shares of the Fund will generally not be deductible for
federal income tax purposes under Section 265 of the Internal Revenue Code. In
addition, under rules used by the Internal Revenue Service for determining when
borrowed funds are considered to be used for the purpose of purchasing or
carrying particular assets, the purchase of shares may be considered to have
been made with borrowed funds even though the borrowed funds are not directly
traceable to the purchase of shares.

Persons holding certain municipal obligations who are also substantial users
(or persons related thereto) of facilities financed by such obligations may not
exclude interest on such obligations from their gross income. No investigation
as to the users of the facilities financed by municipal obligations in the
portfolios of the Series has been made by the Fund. Potential investors should
consult their tax advisers with respect to this matter before purchasing shares
of the Fund.

From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the federal income tax exemption for
interest on certain state and municipal obligations. It can be expected that
similar proposals may be introduced in the future. If such a proposal were
enacted, the availability of state or municipal obligations for investment by
each Series of the Fund and the value of portfolio securities held by the Series
would be affected. In addition, each Series of the Fund would reevaluate its
investment objective and policies.

All distributions of taxable net investment income and net capital gains,
whether received in shares or cash, must be reported by each shareholder on his
or her federal income tax return. In addition, each shareholder must disclose on
his or her return the amount of tax-exempt dividends received from the Fund.
Under federal income tax law, each Series of the Fund will be required to report
to the Internal Revenue Service all distributions of taxable income and capital
gains as well as gross proceeds from the redemption or exchange of shares of
such Series, except in the case of certain exempt shareholders. Further, all
such distributions and proceeds from the redemption or exchange of shares may be
subject to withholding of federal income tax at the rate of 31% in the case of
nonexempt shareholders who fail to furnish the appropriate Series of the Fund
with their taxpayer identification numbers on IRS Form W-9 and with required
certifications regarding their status under the federal income tax law. If the
withholding provisions are applicable, any such distributions and proceeds,
whether taken in cash or reinvested in shares, will be reduced by the amounts
required to be withheld. Investors may wish to consult their tax advisers about
the applicability of the backup withholding provisions.

Each Series is required under the Internal Revenue Code to distribute 98% of
its ordinary income in the same calendar year in which it is earned. Each Series
is also required to distribute during the calendar year 98% of the capital gain
net income it earned during the twelve months ending on October 31 of such
calendar year. In addition, the Series must distribute during the calendar year
any undistributed ordinary income and undistributed capital gain net income from
the prior year or the 12 month period ending on October 31 of such prior
calendar year, respectively. To the extent it does not meet these distribution
requirements, a Series will be subject to a non-deductible 4% excise tax on the
undistributed amount. For purposes of this excise tax, income on which the
Series pays income tax is treated as distributed.

A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the Fund.

Dividends of net investment income and distributions of net short-term
capital gains paid to a shareholder (including a shareholder acting as a nominee
or fiduciary) who is a nonresident alien individual, a foreign corporation or a
foreign partnership (foreign shareholder) are subject to a 30% (or lower treaty
rate) withholding tax upon the gross amount of the dividends unless the

B-27
<PAGE>
dividends are effectively connected with a U.S. trade or business conducted by
the foreign shareholder. Capital gain dividends paid to a foreign shareholder
are generally not subject to withholding tax. A foreign shareholder will,
however, be required to pay U.S. income tax on any dividends and capital gain
distributions which are effectively connected with a U.S. trade or business of
the foreign shareholder.

The per share dividends on Class B and Class C shares will be lower than the
per share dividends on Class A shares as a result of the higher
distribution-related fee applicable to the Class B and Class C shares. The per
share distributions of net capital gains, if any, will be paid in the same
amount for each Class of shares. The per share dividends on Class A shares will
be lower than the per share dividends on Class Z shares, since Class Z shares
bear no distribution-related fee.

PERFORMANCE INFORMATION

YIELD. Each Series may from time to time advertise its yield as calculated
over a 30-day period. Yield is calculated separately for Class A, Class B, Class
C and Class Z shares. This yield will be computed by dividing a Series' net
investment income per share earned during this 30-day period by the maximum
offering price per share on the last day of this period. Yield is calculated
according to the following formula:

a - b
YIELD = 2[( ------- +1)to the power of 6 - 1]
cd

Where: a = dividends and interest earned during the period.
b = expenses accrued for the period.
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the period.

Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.

The yield for the 30 days ended April 30, 1998 was 4.82% (4.77% without the
management fee waiver), 4.52% and 3.31% for Class A shares of the High Income
Series, Insured Series and Intermediate Series, respectively. The yield for the
30 days ended April 30, 1998 was 4.57% (4.52% without the management fee
waiver), 4.25% and 3.01% for Class B shares of the High Income Series, Insured
Series and Intermediate Series, respectively. The yield for the 30 days ended
April 30, 1998 was 4.32% (4.27% without the management fee waiver), 4.00% and
2.76% for Class C shares of the High Income Series, Insured Series and
Intermediate Series, respectively. The yield for the 30 days ended April 30,
1998 was 5.08% (5.03% without the management fee waiver), 4.76% and 3.51% for
Class Z shares of the High Income Series, Insured Series and Intermediate
Series, respectively.

Each Series may also calculate the tax equivalent yield over a 30-day
period. The tax equivalent yield will be determined by first computing the yield
as discussed above. The Series will then determine what portion of that yield is
attributable to securities, the income of which is exempt for federal income tax
purposes. This portion of the yield will then be divided by one minus 39.6% (the
assumed maximum tax rate for individual taxpayers not subject to alternative
minimum tax) and then added to the portion of the yield that is attributable to
other securities. For the 30 days ended April 30, 1998, the tax equivalent yield
for the Class A shares of the High Income Series, Insured Series and
Intermediate Series was 7.98% (7.90% without the management fee waiver), 7.48%
and 5.48%, respectively. For the 30 days ended April 30, 1998, the tax
equivalent yield for the Class B shares of the High Income Series, Insured
Series and Intermediate Series was 7.57% (7.48% without the management fee
waiver), 7.04% and 4.98%, respectively. For the 30 days ended April 30, 1998,
the tax equivalent yield for the Class C shares of the High Income Series,
Insured Series and Intermediate Series was 7.15% (7.07% without the management
fee waiver), 6.62% and 4.57%, respectively. For the 30 days ended April 30,
1998, the tax equivalent yield for the Class Z shares of the High Income Series,
Insured Series and Intermediate Series was 8.41% (8.33% without the management
fee waiver), 7.88% and 5.81%, respectively.

The following chart shows the tax-equivalent yield of an investment at
varying rates:
<TABLE>
<CAPTION>
A TAX-EXEMPT YIELD OF:
<S> <C> <C> <C> <C> <C> <C> <C>
3.5% 4.0% 4.5% 5.0% 5.5% 6% 6.5%

<CAPTION>
FEDERAL
TAX RATE IS EQUIVALENT TO A TAXABLE RATE OF:
<S> <C> <C> <C> <C> <C> <C> <C>
28 % 4.86% 5.56% 6.25% 6.94% 7.64% 8.33% 9.03%
31 % 5.07% 5.80% 6.52% 7.25% 7.97% 8.70% 9.42%
39.6% 5.79% 6.62% 7.45% 8.28% 9.11% 9.93% 10.76%
</TABLE>

B-28
<PAGE>
Income earned on this portfolio could be subject to the federal alternative
minimum tax. The above information is for illustrative purposes only and is not
intended to imply actual performance.

AVERAGE ANNUAL TOTAL RETURN. Each Series may from time to time advertise its
average annual total return. Average annual total return is determined
separately for Class A, Class B, Class C and Class Z shares. See "How the Fund
Calculates Performance" in the Prospectus.

Average annual total return is computed according to the following formula:

P(1+T) to the power of n = ERV
Where: P = a hypothetical initial payment of $1000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.

Average annual total return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.

The average annual total return and subsidy/waiver adjusted average annual
total return from the inception of the Class A shares (January 22, 1990) and for
the one year and five year periods ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1998 1998 INCEPTION 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 7.5% 6.4% 7.5% 7.4% 6.3% 7.5%
Insured Series 6.9% 5.1% 5.4% 6.9% 5.0% 5.4%
Intermediate Series 6.1% 4.2% 3.6% 6.0% 4.2% 3.6%
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return of the Class B shares for the one, five and ten year periods ended
April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1998 1998 1998 1998 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 8.2% 6.4% 5.4% 8.1% 6.4% 5.4%
Insured Series 7.4% 5.1% 3.2% 7.3% 5.1% 3.2%
Intermediate Series 6.4% 4.3% 1.3% 6.0% 4.2% 1.3%
</TABLE>

The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class C shares (August 1, 1994) and for the
one year ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 7.3% 9.1% 7.3% 9.1%
Insured Series 6.1% 7.0% 6.1% 7.0%
Intermediate Series 4.6% 5.1% 4.5% 5.1%
</TABLE>

B-29
<PAGE>
The average annual total return and subsidy/waiver adjusted average annual
total return from inception of the Class Z shares (September 16, 1996) and for
the one year ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
YEAR -----------------------
ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 9.5% 10.9% 9.4% 10.9%
Insured Series 7.1% 8.7% 7.1% 8.7%
Intermediate Series 5.8% 6.9% 5.7% 6.9%
</TABLE>

AGGREGATE TOTAL RETURN. Each Series may also advertise its aggregate total
return. Aggregate annual total return is determined separately for Class A,
Class B, Class C and Class Z shares. See "How the Fund Calculates Performance"
in the Prospectus.

Aggregate total return represents the cumulative change in the value of an
investment in a Series and is computed according to the following formula:

ERV - P
-------
P
Where: P = a hypothetical initial payment of $1000.
ERV = Ending Redeemable Value at the end of the 1, 5 or 10 year periods
(or fractional portion thereof) of a hypothetical $1000 payment
made at the beginning of the 1, 5 or 10 year periods.

Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charge.

The aggregate total return and subsidy/waiver adjusted aggregate total
return from the inception of the Class A shares (January 22, 1990) and for the
one year and five year periods ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
FIVE YEARS FIVE YEARS
ENDED YEAR ENDED ENDED YEAR ENDED
FROM APRIL 30, APRIL 30, FROM APRIL 30, APRIL 30,
SERIES INCEPTION 1998 1998 INCEPTION 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 87.3% 40.3% 10.8% 86.6% 40.1% 10.8%
Insured Series 79.3% 31.9% 8.7% 78.3% 31.7% 8.7%
Intermediate Series 68.5% 26.9% 6.8% 66.5% 26.7% 6.8%
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return of the Class B shares for the one, five and ten year periods ended April
30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
------------------------------------
TEN YEARS FIVE YEARS TEN YEARS FIVE YEARS
ENDED ENDED YEAR ENDED ENDED ENDED YEAR ENDED
APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30, APRIL 30,
SERIES 1998 1998 1998 1998 1998 1998
- ---------------------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
High Income Series 118.9% 37.5% 10.4% 117.3% 37.4% 10.4%
Insured Series 104.9% 29.4% 8.2% 102.2% 29.2% 8.2%
Intermediate Series 85.9% 24.3% 6.3% 79.3% 24.0% 6.3%
</TABLE>

B-30
<PAGE>
The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class C shares (August 1, 1994) and for the one
year period ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 30.1% 10.1% 30.0% 10.1%
Insured Series 24.8% 8.0% 24.6% 8.0%
Intermediate Series 18.3% 6.1% 18.0% 6.1%
</TABLE>

The aggregate total return and subsidy/waiver adjusted aggregate total
return from inception of the Class Z shares (September 16, 1996) and for the one
year ended April 30, 1998 were as follows:

<TABLE>
<CAPTION>
SUBSIDY/WAIVER
ADJUSTED
-----------------------
YEAR ENDED YEAR ENDED
FROM APRIL 30, FROM APRIL 30,
SERIES INCEPTION 1998 INCEPTION 1998
- ---------------------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
High Income Series 15.7% 10.9% 15.6% 10.9%
Insured Series 11.8% 8.7% 11.7% 8.7%
Intermediate Series 9.5% 6.9% 9.4% 6.9%
</TABLE>

From time to time, the performance of the Series may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term and the rate of inflation.(1)

EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC

<TABLE>
<CAPTION>
A LOOK AT PERFORMANCE
OVER THE LONG-TERM
AVERAGE ANNUAL
RETURNS
1/1/26-12/31/97
<S> <C> <C> <C>

Long-Term
Common Stocks Govt. Bonds Inflation
11.0% 5.2% 3.1%
</TABLE>

- ------------------------
(1)Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Used with permission. All rights reserved. Common stock
returns are based on the Standard & Poor's 500 Stock Index, a
market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock
price movements. This chart is for illustrative purposes only, and is
not intended to represent the performance of any particular
investment or fund. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.

ORGANIZATION AND CAPITALIZATION

The Fund is a Massachusetts business trust established under a Declaration
of Trust dated November 3, 1986. The Declaration of Trust and the By-Laws of the
Fund are designed to make the Fund similar in certain respects to a
Massachusetts business corporation. The principal distinction between the two
forms relates to shareholder liability. Under Massachusetts law, shareholders of
a business trust may, in certain circumstances, be held personally liable as
partners for the obligations of the

B-31
<PAGE>
fund, which is not the case with a corporation. The Declaration of Trust of the
Fund provides that shareholders shall not be subject to any personal liability
for the acts or obligations of the Fund and that every written obligation,
contract, instrument or undertaking made by the Fund shall contain a provision
to the effect that the shareholders are not individually bound thereunder.

Massachusetts counsel for the Fund has advised the Fund that no personal
liability with respect to contract obligations will attach to the shareholders
under any undertaking containing such a provision when adequate notice of the
provision is given, except possibly in a few jurisdictions. With respect to all
types of claims in the latter jurisdictions and with respect to tort claims,
contract claims where the provision referred to is omitted from the undertaking,
claims for taxes and certain statutory liabilities, shareholders may be held
personally liable to the extent that claims are not satisfied by the Fund.
However, upon payment of any such liability, shareholders will be entitled to
reimbursement from the general assets of the appropriate Series of the Fund. The
Trustees intend to conduct the operations of the Fund in such a way so as to
avoid, to the extent possible, ultimate liability of the shareholders for
liabilities of the Fund.

The Declaration of Trust further provides that no Trustee, officer, employee
or agent of the Fund is liable to the Fund or to a shareholder, nor is any
Trustee, officer, employee or agent liable to any third persons in connection
with the affairs of the Fund, except as this liability may arise from his or her
own bad faith, willful misfeasance, gross negligence, or reckless disregard of
his or her duties. It also provides that all third parties shall look solely to
the Fund property or the property of the appropriate Series of the Fund for
satisfaction of claims arising in connection with the affairs of the Fund or of
the particular Series of the Fund, respectively. With the exceptions stated, the
Declaration of Trust permits the Trustees to provide for the indemnification of
Trustees, officers, employees or agents of the Fund against all liability in
connection with the affairs of the Fund.

The Fund does not intend to issue share certificates or hold annual meetings
of shareholders.

The Fund and all Series thereof shall continue without limitation of time
subject to the provisions in the Declaration of Trust concerning termination by
action of the shareholders or by the Trustees by written notice to the
shareholders.

The authorized capital of the Fund consists of an unlimited number of shares
of beneficial interest, $.01 par value, issued in three classes in separate
Series. Each Series of the Fund, for federal income tax and Massachusetts state
law purposes, will constitute a separate trust which will be governed by the
provisions of the Declaration of Trust. All shares of any Series issued and
outstanding will be fully paid and non-assessable by the Fund. Each share of
each Series represents an equal proportionate interest in that Series with each
other share of that Series. The assets of the Fund received for the issue or
sale of the shares of each Series and all income, earnings, profits and proceeds
thereof, subject only to the rights of creditors of that Series, are specially
allocated to the Series and constitute the underlying assets of the Series. The
underlying assets of each Series are segregated on the books of account and are
to be charged with the liabilities in respect to the Series and with a share of
the general liabilities of the Fund. Under no circumstances would the assets of
a Series be used to meet liabilities that are not otherwise properly chargeable
to it. Expenses with respect to any two or more Series are to be allocated in
proportion to the asset value of the respective Series except where allocations
of direct expenses can otherwise be fairly made. The officers of the Fund,
subject to the general supervision of the Trustees, have the power to determine
which liabilities are allocable to a given Series or which are general or
allocable to two or more Series. Upon redemption of shares of a Series of the
Fund, the shareholder will receive proceeds solely of the assets of such Series.
In the event of the dissolution or liquidation of the Fund, the holders of the
shares of any Series are entitled to receive as a class the underlying assets of
that Series available for distribution to shareholders.

Shares of the Fund entitle their holders to one vote per share. Matters will
be acted upon by the vote of the shareholders of each class of each Series
separately, except to the extent otherwise provided in the Investment Company
Act. A change in the investment objective or investment restrictions for a
Series would be voted upon only by shareholders of the Series involved. In
addition, approval of any investment advisory agreement is a matter to be
determined separately by each Series. Approval by the shareholders of one Series
is effective as to that Series whether or not enough votes are received from the
shareholders of the other Series to approve the proposal as to those Series.

Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios with distinct investment
objectives and policies and share purchase, redemption and net asset valuation
procedures) with such preferences, privileges, limitations and voting and
dividend rights as the Trustees may determine. All consideration received by the
Fund for shares of any additional series, and all assets in which such
consideration is invested, would belong to that series (subject only to the
rights of creditors of such series) and would be subject to the liabilities
related thereto.

Pursuant to the Investment Company Act, shareholders of any additional
series of shares would normally have to approve the adoption of any advisory
contract relating to such series and of any changes in the investment objective
or investment restrictions related thereto. The Trustees have the power to alter
the number and the terms of office of the Trustees, and they may at any time

B-32
<PAGE>
lengthen their own terms or make their terms of unlimited duration and appoint
their own successors, provided that always at least a majority of the Trustees
have been elected by the shareholders of the Fund. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees.

CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENT
AND INDEPENDENT ACCOUNTANTS

State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts 02171, serves as Custodian for the Fund's portfolio securities and
cash and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund. See "How the Fund is
Managed--Custodian and Transfer and Dividend Disbursing Agent" in the
Prospectus.

Prudential Mutual Fund Services LLC (PMFS), Raritan Plaza One, Edison, New
Jersey 08837, serves as Transfer and Dividend Disbursing Agent. It is a
wholly-owned subsidiary of PIFM. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, payment of dividends and distributions and related functions. For these
services, PMFS receives an annual fee of $13.00 per shareholder account, a new
account set-up fee of $2.00 for each manually established account and a monthly
inactive zero balance account fee of $20.00 per shareholder account. PMFS is
also reimbursed for its out-of-pocket expenses, including but not limited to
postage, stationery, printing, allocable communications expenses and other
costs. For the fiscal year ended April 30, 1998, the Fund incurred fees of
approximately $609,100 ($361,000-High Income Series, $221,700-Insured Series and
$26,400-Intermediate Series) for the services of PMFS.

Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York 10036,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.

B-33
<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.0%
- ---------------------------------------------------------------------------------------------------------------------------------
Arizona--1.8%
Coconino Cnty. Pol. Ctrl. Corp. Rev.
Tucson Elec. Pwr., Navajo A B2 7.125% 10/01/32 $ 5,000 $ 5,706,500
Tucson Elec. Pwr., Navajo B B2 7.00 10/01/32 1,700 1,934,175
Pima Cnty. Ind. Dev. Auth.,
Multifam. Mtge. Rev., La Cholla Proj. NR 8.50 7/01/20 9,680 10,103,694
Tuscon Elec. Pwr. Co., Ser. A B2 6.10 9/01/25 2,000 2,044,000
--------------
19,788,369
- ---------------------------------------------------------------------------------------------------------------------------------
Arkansas--0.7%
Northwest Arkansas Reg'l. Arpt. Auth. Rev. NR 7.625 2/01/27 7,000 8,012,130
- ---------------------------------------------------------------------------------------------------------------------------------
California--10.4%
Abag Fin. Auth. For Nonprofit Corps. Ref. Amer. Baptist
Homes., Ser. A BBB(b) 6.20 10/01/27 3,200 3,353,312
California Hsg. Fin. Agcy. Rev., Home Mtge., Ser. G Aa 8.15 8/01/19 795 813,841
Corona Ctfs. of Part., Vista Hosp. Sys. Inc., Ser. C NR 8.375 7/01/11 10,000 11,161,600
Delano Ctfs. of Part., Reg'l. Med. Ctr., Ser. A NR 9.25 1/01/22 6,710 7,811,245
Folsom Spec. Tax Dist. No. 2 NR 7.70 12/01/19 3,130(c) 3,369,351
Long Beach Harbor Rev. Ref., Ser. A, F.G.I.C. Aaa 6.00 5/15/19 4,000 4,379,280
Long Beach Redev. Agcy. Hsg.,
Multifam. Hsg. Rev., Pacific Court Apts. NR 6.95 9/01/23 6,195(e) 3,407,250
Multifam. Hsg. Rev., Pacific Court Apts., Issue B NR 6.80 9/01/13 3,805(e) 2,092,750
Los Angeles Regl. Arpts. Impvt. Corp., Cont. Air
Sublease NR 9.25 8/01/24 10,270 12,303,357
Orange Cnty. Cmnty. Loc. Trans. Auth., Reg. Linked
Savrs. & Ribs Aa3 6.20 2/14/11 7,000 7,862,330
Richmond Redev. Agcy. Rev., Multifam. Bridge Affordable
Hsg. NR 7.50 9/01/23 10,000 10,041,400
Roseville Joint Union H.S. Dist.,
Ser. B, F.G.I.C. Aaa Zero 8/01/09 1,740 1,010,296
Ser. B, F.G.I.C. Aaa Zero 8/01/11 1,890 970,893
Ser. B, F.G.I.C. Aaa Zero 8/01/14 2,220 948,695
Sacramento City Fin. Auth. Rev., Tax Alloc., M.B.I.A. Aaa Zero 11/01/15 5,695 2,256,473
Sacramento Cnty. Spec. Tax Rev., Dist. No. 1 NR 8.25 12/01/20 4,500(c) 5,025,735
San Joaquin Hills Trans. Corr. Agcy.,
Toll Rd. Rev. Aaa Zero 1/01/14 8,420 3,801,462
Toll Rd. Rev. Aaa Zero 1/01/25 10,000 2,497,500
San Luis Obispo Ctfs. of part., Vista Hosp. Sys., Inc. NR 8.375 7/01/29 4,000 4,381,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-34

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Santa Margarita/Dana Point Auth., Impvt. Dist.,
Ser. A, M.B.I.A. Aaa 7.25% 8/01/13 $ 1,990(i) $ 2,468,515
Ser. B, M.B.I.A. Aaa 7.25 8/01/12 3,000(i) 3,692,280
So. California Pub. Pwr. Auth. Trans., Cap. Apprec. Aa3 Zero 7/01/14 8,500 3,619,640
So. San Francisco Redev. Agcy., Tax Alloc., Gateway
Redev. Proj. NR 7.60 9/01/18 2,375 2,579,345
So. Tahoe Joint Pwrs. Fin. NR 8.00 10/01/01 5,795 5,883,548
Turlock Irrigation Dist. Rev., Ser. A, M.B.I.A. Aaa 6.25 1/01/12 5,000 5,639,700
Victor Valley Union H.S. Dist.,+
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/12 3,605 1,729,391
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/14 4,740 2,016,775
Gen. Oblig., M.B.I.A. Aaa Zero 9/01/16 3,990 1,504,629
--------------
116,621,593
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--3.0%
Denver Urban Ren. Auth. Tax,
Inc. Rev. NR 7.50 9/01/04 3,000 3,201,600
Inc. Rev. NR 7.75 9/01/16 4,000 4,423,080
Eagle Cnty. Co., Lake Creek Affordable Hsg., Ser. A NR 8.00 12/01/23 11,395 11,947,886
San Miguel Cnty., Mountain Vlge. Met. Dist. NR 8.10 12/01/11 3,200(c) 3,691,923
Superior Met. Dist. No. 1, Wtr. & Swr.,
Rev. NR 7.50 12/01/98 855 867,158
Rev. NR 8.50 12/01/13 8,900 9,951,357
--------------
34,083,004
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.0%
Connecticut St. Dev. Auth. Mystic Marinelife Aquarium
Proj. Rev. NR 7.00 12/01/27 1,500 1,593,825
Connecticut St. Dev. Auth. Swr., Netco Waterbury Ltd. NR 9.375 6/01/16 8,000 9,350,720
--------------
10,944,545
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--1.6%
Dist. of Columbia Rev., Nat'l. Public Radio NR 7.625 1/01/18 8,800 9,610,832
Dist. of Columbia, Ser. A Ba1 5.25 6/01/27 9,000 8,463,960
--------------
18,074,792
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Crossings At Fleming Island Cmnty. Dev. Dist., Clay City NR 8.25 5/01/16 7,860 8,649,301
Escambia Cnty. Hlth. Facs. Auth. Rev., Baptist Hosp.
Ref., Ser. A BBB+(b) 8.60 10/01/02 3,375 3,499,031
Florida Hsg. Fin. Agcy., Palm Aire Proj., Multifam.
Mtge. Rev. NR 10.00 1/01/20 9,448(e) 7,464,403
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-35

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Florida (cont'd.)
No. Springs Impvt. Dist. Wtr. Mgt.,
Ser. A NR 8.20% 5/01/24 $ 1,960 $ 2,159,704
Ser. A NR 8.30 5/01/24 1,720 1,904,900
Northern Palm Beach Cnty. Impt. Ref., Wtr. Ctl. & Impt.
Unit Dev. NR 6.00 8/01/10 3,250 3,216,363
Orlando Util. Comm., Wtr. & Elec. Rev., Ser. D Aa2 6.75 10/01/17 2,000 2,398,060
Palm Beach Cnty. Hsg. Auth., Banyan Club Apts. NR 7.75 3/01/23 4,470 4,812,044
Sarasota Hlth. Facs., Kobernick Hsg. Meadow Park Proj. Aaa 10.00 7/01/22 6,855(c) 8,335,132
Seminole Cnty. Ind. Dev. Auth. Rev., Fern Park NR 9.25 4/01/12 4,335 4,361,487
--------------
46,800,425
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--3.2%
Atlanta Arpt. Facs. Rev., M.B.I.A. Aaa Zero 1/01/10 2,000 1,061,840
Atlanta Urban Res. Fin. Auth., Clark Atlanta Univ. Dorm.
Proj. NR 9.25 6/01/10 4,440(c) 4,947,758
Effingham Cnty. Dev. Auth., Ft. Howard Corp. Baa3 7.90 10/01/05 10,000 10,676,900
Fulton Cnty. Wtr. & Swr. Rev., F.G.I.C. Aaa 6.375 1/01/14 6,000(i) 6,874,260
Henry Cnty. Wtr. & Swg. Auth. Rev., A.M.B.A.C. Aaa 6.15 2/01/20 3,000 3,393,330
Rockdale Cnty. Dev. Auth., Solid Wste. Disp. Rev. NR 7.50 1/01/26 8,100 8,769,951
--------------
35,724,039
- ---------------------------------------------------------------------------------------------------------------------------------
Hawaii--1.1%
Hawaii Cnty. Impvt. Dist. No. 17 NR 9.50 8/01/11 6,565 7,093,614
Hawaii St. Dept. Trans. Spl. Fac. Rev., Continental
Airlines, Inc. Ba2 5.625 11/15/27 5,225 5,127,449
--------------
12,221,063
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--9.3%
Chicago Brd. Edl., Lease Ctfs., Ser. A, M.B.I.A. Aaa 6.00 1/01/20 10,000 11,045,600
Chicago O'Hare Int'l. Arpt.,
Amer. Airlines Proj., Ser. B Baa2 8.20 12/01/24 1,000 1,204,930
United Airlines, Ser. B Baa2 8.45 5/01/07 6,000 6,519,000
United Airlines, Ser. B Baa2 8.50 5/01/18 6,500 7,059,260
United Airlines, Ser. B Baa2 8.85 5/01/18 2,700 3,026,943
United Airlines, Ser. B Baa2 8.95 5/01/18 2,320 2,603,388
Chicago Pub. Bldg. Comm. Rev., Ser. A, M.B.I.A. Aaa 7.00 1/01/20 6,530(i) 8,115,484
Hennepin Ind. Dev. Rev., Exolon-Esk Co. Proj. NR 8.875 1/01/18 8,000 8,996,400
Illinois Reg'l. Trans. Auth. Ref., F.G.I.C. Aaa 6.00 6/01/14 3,530 3,892,037
Illinois St. Hlth. Facs. Auth. Rev.,
Adventist Living Ctr. NR 11.00 12/01/15 2,245(e) 202,009
Beacon Hill Proj., Ser. A NR 9.00 8/15/19 7,135 7,531,064
Midwest Physician Group Ltd. Proj. BBB-(b) 8.10 11/15/14 3,075 3,726,531
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-36

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois (cont'd.)
Midwest Physician Group Ltd. Proj. BBB-(b) 5.50% 11/15/19 $ 2,000 $ 1,924,060
Midwest Physician Group Ltd. Proj. BBB-(b) 8.125 11/15/19 3,285 3,985,625
Illinois, Ser. K, A.M.B.A.C. Aaa 6.25 1/01/13 6,825 7,688,636
Kane And De Kalb Cntys. Sch.,
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/11 3,360 1,666,157
Dist. No. 301, Cap. Apprec. A.M.B.A.C. Aaa Zero 12/01/13 4,065 1,777,055
Vlge. of Robbins, Cook Cnty. Robbins Res. Rec. NR 8.375 10/15/16 18,000 18,670,500
Winnebago Cnty. Hsg. Auth., Park Tower Assoc., Sec. 8 NR 8.125 1/01/11 3,954 4,202,656
--------------
103,837,335
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.1%
Bluffton Econ. Dev. Rev., Kroger Co. Proj. Baa3 7.85 8/01/15 7,500 8,483,700
Indianapolis Int'l. Arpt. Auth. Rev., Federal Express
Corp. Proj. Baa2 7.10 1/15/17 6,000 6,708,660
Wabash Econ. Dev. Rev. Bonds, Connell Ltd. NR 8.50 11/24/17 7,250 8,032,130
--------------
23,224,490
- ---------------------------------------------------------------------------------------------------------------------------------
Iowa--2.6%
City of Cedar Rapids Rev.,
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/18 9,375 11,076,469
1st Mtge., Cottage Grove Place Proj. NR 9.00 7/01/25 4,435 5,239,908
Iowa St. Fin. Auth., Hlth. Care Facs. Rev., Mercy Hlth.
Initiatives Proj. NR 9.25 7/01/25 10,000 13,348,100
--------------
29,664,477
- ---------------------------------------------------------------------------------------------------------------------------------
Kentucky--0.8%
Kentucky St. Tpke. Auth. Rev., F.G.I.C. Aaa Zero 1/01/10 8,250 4,646,895
Owensboro Elec. Lt. & Pwr. Rev.,
Ser. B, A.M.B.A.C. Aaa Zero 1/01/14 5,000(i) 2,209,650
Ser. B, A.M.B.A.C. Aaa Zero 1/01/16 6,650(i) 2,620,699
--------------
9,477,244
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--3.1%
Hodge Util. Rev., Stone Container Corp. NR 9.00 3/01/10 7,000 7,560,350
New Orleans Home Mtge. Auth. Rev., Sngl. Fam. Mtge.,
Ser. A, G.N.M.A. Aaa 8.60 12/01/19 1,670(f) 1,721,970
New Orleans Ind. Dev. Rev. BBB(b) 8.75 10/01/19 3,600 4,224,276
New Orleans, Gen Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/18 3,090 1,051,836
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-37

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana (cont'd.)
St. Charles Parish Poll. Ctrl. Rev.,
Pwr. & Lt. Co. Baa3 8.25% 6/01/14 $ 10,000 $ 10,659,000
Pwr. & Lt. Co., Ser. 1989 Baa3 8.00 12/01/14 3,500 3,774,015
West Feliciana Parish Poll. Ctrl. Rev., Gulf St. Util.
Co. Proj. NR 9.00 5/01/15 5,250 5,802,038
--------------
34,793,485
- ---------------------------------------------------------------------------------------------------------------------------------
Maryland--1.8%
Anne Arundel Cnty. 1st Mtge. Rev., Pleasant Living Conv. NR 8.50 7/01/13 3,230 3,503,807
Northeast Wste. Disp. Auth.,
Sludge Comp. Fac. NR 7.25 7/01/07 4,059 4,459,095
Sludge Comp. Fac. NR 8.50 7/01/07 3,095 3,378,100
Washington Sub. San. Dist.
Ref., Gen. Const. Aa1 6.00 6/01/18 3,705 4,115,885
Ref., Gen. Const. Aa1 6.00 6/01/19 3,940 4,372,927
--------------
19,829,814
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--4.7%
Boston Ind. Dev. Fin. Auth. Ind. Rev., 1st Mtge.
Springhouse Proj. NR 9.25 7/01/15 8,000 9,962,560
Mass. Bay Trans. Auth., Gen. Trans. Sys., Ser. A,
F.G.I.C. Aaa 7.00 3/01/21 7,500(i) 9,303,150
Mass. St. Coll. Bldg. Proj. and Ref. Bonds A1 7.50 5/01/14 1,750(i) 2,216,795
Mass. St. Hlth. & Edl. Facs. Auth. Rev.,
Cardinal Cushing Gen. Hosp. NR 8.875 7/01/18 7,500 7,967,250
St. Josephs Hosp., Ser. C NR 9.50 10/01/20 5,640(c) 6,176,815
Mass. St. Ind. Fin. Agcy. Cont. Res., Ser. A NR 9.50 2/01/00 1,100 1,133,616
Massachusetts St. Indl. Fin. Agcy. Rev.,
Ref., Chestnut Knoll Proj. A NR 5.50 2/15/18 1,250 1,224,650
Ref., Chestnut Knoll Proj. A NR 5.625 2/15/25 1,250 1,219,488
Glenmeadow Proj. NR 7.00 2/15/06 3,700 3,700,000
Massachusetts St. Wtr. Res. Auth., Ser. A, F.S.A. Aaa 5.50 8/01/14 3,250 3,417,960
Randolph Hsg. Auth., Multifam. Hsg., Liberty Place Proj.
A, Ser. A NR 9.00 12/01/21 5,885 5,965,448
--------------
52,287,732
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--4.6%
Grand Rapids Dev. Auth.
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/10 3,000 1,647,690
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/11 3,160 1,628,601
Cap. Apprec., M.B.I.A. Aaa Zero 6/01/12 3,000 1,449,720
Gratiot Cnty. Econ. Dev. Corp., Danley Die Proj. Connell
L.P. NR 7.625 4/01/07 3,200 3,480,160
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-38

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan (cont'd.)
Holland Sch. Dist., Cap. Apprec., A.M.B.A.C. Aaa Zero 5/01/17 $ 2,950 $ 1,069,729
Lowell Area Sch., F.G.I.C. Aaa Zero 5/01/14 5,000 2,154,700
Michigan St. Hosp. Fin. Auth. Rev.,
Genesys Regl. Hosp. Baa2 5.50% 10/01/27 3,250 3,171,187
Saratoga Cmnty. Hosp. NR 8.75 6/01/10 6,345(c) 7,313,945
Michigan Strategic Fund, Great Lakes Pulp & Fiber Proj. NR 8.00 12/01/27 12,291 11,861,008
Michigan Strategic Fund, Solid Wste. Disp., Gennese Pwr.
Station NR 7.50 1/01/21 10,000 10,824,600
Wayne Cnty. Bldg. Auth., Ser. A Baa2 8.00 3/01/17 3,500(c) 3,994,830
West Ottawa Sch. Dist.,
F.G.I.C. Aaa Zero 5/01/15 4,825 1,956,489
F.G.I.C. Aaa Zero 5/01/18 3,000 1,029,300
--------------
51,581,959
- ---------------------------------------------------------------------------------------------------------------------------------
Minnesota--0.4%
Minneapolis St. Paul Hsg. Fin. Brd., Multifam. Mtge.
Rev., Riverside Plaza, G.N.M.A. AAA(b) 8.25 12/20/30 4,000 (i) 4,132,440
- ---------------------------------------------------------------------------------------------------------------------------------
Mississipi--1.6%
Claiborne Cnty. Poll. Ctrl. Rev.,
Mid. So. Engy. Sys. Ba1 9.875 12/01/14 6,100 6,448,066
Mid. So. Engy. Sys., Ser. A Ba1 9.50 12/01/13 10,350 10,918,422
--------------
17,366,488
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--2.0%
Sikeston Elec. Rev. Ref., M.B.I.A. Aaa 6.00 6/01/15 9,250 10,258,712
St. Louis Cnty. Ind. Dev. Auth. Rev.,
Soemm Proj. NR 10.25 7/01/08 1,560 1,565,257
Soemm Proj. NR 10.25 7/01/08 590 591,989
St. Louis Cnty. Reg. Conv. & Sports Comp., Ser. C Aaa 7.90 8/15/21 8,820(c) 10,262,335
--------------
22,678,293
- ---------------------------------------------------------------------------------------------------------------------------------
Nebraska--0.1%
Nebraska Invest. Fin. Auth., G.N.M.A., Sngl. Fam. Mtge.
Rev.,
Ser. I, M.B.I.A. Aaa 8.125 8/15/38 1,615(i) 1,656,942
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-39

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Hampshire--1.7%
New Hampshire Higher Edl. & Hlth. Facs. Auth. Rev.,
Antioch College NR 7.875% 12/01/22 $ 5,335 $ 5,942,817
Havenwood/Heritage Heights NR 9.75 12/01/19 7,495(c) 8,372,964
New Hampshire St. Bus. Pollutn. Ref., Pub. Svc. Co. Ba3 6.00 5/01/21 5,000 5,004,700
--------------
19,320,481
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.5%
New Jersey Econ. Dev. Corp. Rev., Ref. Newark Arpt.
Marriot Hotel NR 7.00 10/01/14 3,800 4,171,298
New Jersey Hlthcare Facs., Fin. Auth. Rev. NR 8.00 7/01/27 5,000 5,486,650
New Jersey St. Econ. Dev. Auth. Rev., 1st Mtge.,
Fellowship Vlge., Proj. A Aaa 9.25 1/01/25 11,500(c) 14,690,790
Leisure Park Proj., Ser. A NR 5.875 12/01/27 4,000 4,031,520
New Jersey St. Edl. Facs. Auth. Rev., Felician College
Of Lodi,
Ser. D NR 7.375 11/01/22 4,000 4,109,840
New Jersey St. Ref., Ser. E Aa1 6.00 7/15/10 10,000(i) 11,157,000
New Jersey St. Tpke. Auth. Rev., Ser. C, M.B.I.A. Aaa 6.50 1/01/16 11,000(i) 12,757,360
New Jersey St. Trans. Trust Fund Auth., Trans. Sys.,
M.B.I.A. Aaa 6.50 6/15/11 14,500(i) 16,786,650
--------------
73,191,108
- ---------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.5%
Farmington Pollutn. Ctrl. Rev.,
Ref., Pub. Svc. Co., Ser. C Ba1 5.80 4/01/22 1,000 1,004,430
Ref., Pub. Svc. Co., Ser. A Ba1 5.80 4/01/22 1,500 1,527,090
Ref., Pub. Svc. Co., Ser. B Ba1 5.80 4/01/22 3,000 3,054,180
--------------
5,585,700
- ---------------------------------------------------------------------------------------------------------------------------------
New York--4.1%
Met. Trans. Auth. Facs. Rev., Ser. N, F.G.I.C. Aaa Zero 7/01/13 8,340(i) 3,827,977
New York City Ind. Dev. Agcy.,
Amer. Airlines Inc. Baa2 8.00 7/01/20 3,320 3,463,424
Bklyn. Navy Yard Cogen Partners Baa3 6.20 10/01/22 6,925 7,503,099
Bklyn. Navy Yard Cogen Partners Baa3 5.75 10/01/36 5,000 4,977,450
Mesorah Pub. Ltd. NR 10.25 3/01/19 1,861 1,974,837
Visy Paper Inc. Proj. NR 7.95 1/01/28 6,500 7,532,850
New York City, Ser. I A3 6.25 4/15/27 3,000 3,208,800
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-40

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New York (cont'd.)
New York St. Dorm. Auth. Rev.,
Colgate Univ., M.B.I.A. Aaa 6.00% 7/01/21 $ 3,350 $ 3,717,863
Memorial Sloan Kettering Cancer Ctr., M.B.I.A. Aaa 5.75 7/01/20 5,000 5,365,850
Port Auth. of New York & New Jersey, USAir, LaGuardia
Arpt. B3 9.125 12/01/15 4,000 4,480,480
--------------
46,052,630
- ---------------------------------------------------------------------------------------------------------------------------------
North Carolina--0.1%
North Carolina Med. Care Comm. Hosp. Rev., Ref. Annie
Penn Mem. Hosp. Baa3 5.375 1/01/22 1,000 973,160
- ---------------------------------------------------------------------------------------------------------------------------------
North Dakota--1.1%
Mercer Cnty., Antelope Valley Station, A.M.B.A.C Aaa 7.20 6/30/13 10,000(i) 12,115,000
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--4.4%
Cleveland Arpt. Spl. Rev., Ref. Continental Airlines,
Inc. Ba2 5.70 12/01/19 4,850(h) 4,740,778
Cleveland Pub. Pwr. Sys. Rev.,
1st Mtge., M.B.I.A. Aaa Zero 11/15/12 1,000 472,010
1st Mtge., M.B.I.A. Aaa Zero 11/15/13 1,500 667,320
1st Mtge., Ser. A, M.B.I.A. Aaa Zero 11/15/09 3,000 1,710,030
Dayton Spl. Facs. Rev., Ref. Emery Air Freight, Ser. A BBB(b) 5.625 2/01/18 3,500(h) 3,498,355
Mahoning Valley San. Dist. Wtr. Rev. NR 7.75 5/15/19 8,000 8,851,040
Montgomery Cnty. Hlthcare. Facs. Rev., Friendship Vlge.
Dayton, Proj. B NR 9.25 2/01/16 4,500(c) 4,965,660
Ohio St. Air Quality Dev. Auth. Ref., Amt. Coll. Poll.
Ctrl., Ser. A Ba1 6.10 8/01/20 3,000 3,103,380
Ohio St. Solid Wste. Rev.,
Cscltd. Proj. NR 8.50 8/01/22 5,000 5,267,600
Rep. Eng. Steels Inc. NR 9.00 6/01/21 2,250 2,408,287
Ohio St. Wtr. Dev. Auth. Poll. Ctrl. Facs., 1st Mtge.,
Toledo Edison Ba1 8.00 10/01/23 5,500 6,286,775
Stark Cnty. Hlthcare. Facs. Rev., Rose Lane Inc. Proj. NR 9.00 12/01/23 6,135 6,985,925
--------------
48,957,160
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Grand River Dam Auth. Rev., A.M.B.A.C. Aaa 6.25 6/01/11 12,000(i) 13,588,080
Tulsa Ind. Dev. Auth., Univ. Tulsa, Ser. A, M.B.I.A. Aaa 6.00 10/01/16 3,250(f) 3,567,817
--------------
17,155,897
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-41

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--5.0%
Allegheny Cnty. Hosp. Rev., West Penn. Hosp. Hlth. Ctr. NR 8.50% 1/01/20 $ 2,800 $ 3,007,508
Berks Cnty. Mun. Auth. Rev.,
Adventist Living Ctrs. Proj. NR 11.00 12/01/15 367(e) 33,072
Alvernia Coll. Proj. NR 7.75 11/15/16 5,240 5,848,154
Dauphin Cnty. Gen. Auth. Hosp. Rev., NW Med. Ctr. Proj. BBB-(b) 8.625 10/15/13 6,570 7,854,961
Lancaster Cnty. Solid Wste. Mgmt., Res. Rec. Auth. Sys.
Rev., Ser. A Baa2 8.50 12/15/10 5,965(c) 6,116,272
Philadelphia Auth., Ind. Dev. Rev. NR 7.75 12/01/17 5,000 5,617,650
Philadelphia Hosps. & Higher Ed. Facs. Auth. Rev.,
Grad. Hlth. Sys. B2 7.00 7/01/05 2,500 2,619,175
Grad. Hlth. Sys. B2 7.25 7/01/18 2,710 2,869,185
Grad. Hlth. Sys., Ser. A B2 6.25 7/01/13 2,500 2,515,500
Philadelphia Wtr. & Wstewtr. Auth. Rev.,
M.B.I.A. Aaa 6.25 8/01/10 2,500 2,807,925
M.B.I.A. Aaa 6.25 8/01/12 3,000(i) 3,375,450
Somerset Cnty. Hosp. Auth. Rev.,
Hlthcare 1st Mtge. NR 8.40 6/01/09 2,305 2,587,316
Hlthcare 1st Mtge. NR 8.50 6/01/24 8,805 9,894,091
Wilkes Barre Gen. Mun. Auth. Coll. Rev., Misericordia
Coll., Ser. A NR 7.75 12/01/12 1,245 1,361,657
--------------
56,507,916
- ---------------------------------------------------------------------------------------------------------------------------------
Rhode Island--1.0%
Rhode Island Redev. Agcy., Ser. A NR 8.00 9/01/24 10,560 11,584,742
- ---------------------------------------------------------------------------------------------------------------------------------
South Carolina--0.4%
So. Carolina St. Hsg. Fin. & Dev. Auth., Homeownership
Mtge. Aa2 7.75 7/01/22 4,345(i) 4,573,982
- ---------------------------------------------------------------------------------------------------------------------------------
South Dakota--0.8%
Education Loans Inc. Student Loan Rev. A2 5.60 6/01/20 3,300 3,226,641
So. Dakota Econ. Dev. Fin. Auth., Dakota Park NR 10.25 1/01/19 4,930 5,258,387
--------------
8,485,028
- ---------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.4%
Knox Cnty. Hlth. & Edl. Facs. Rev., Baptist Hlth. Hosp. Aaa 8.50 4/15/04 5,225(c) 5,549,890
Met. Gov't. Nashville & Davidson Cnty. H&E Facs. Brd.
Rev., Ref.
Blakeford Green Hills NR 5.65 7/01/24 1,500 1,464,825
Rutherford Cnty. Hlth. & Edl. Facs., Brd. 1st Mtge. Rev. NR 9.50 12/01/19 7,300 8,525,451
--------------
15,540,166
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-42

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--3.4%
Beaumont Hsg. Fin. Corp., Sngl. Fam. Mtge. Rev. A1 9.20% 3/01/12 $ 1,380 $ 1,545,434
Houston Arpt. Sys. Rev. Ba2 6.125 7/15/27 3,200 3,333,280
Houston Wtr. & Swr. Sys. Rev., Ser. C, A.M.B.A.C. Aaa Zero 12/01/10 5,000 2,659,250
Keller Ind. Sch. Dist., Cap. Apprec. Ref., Ser. A,
P.S.F.G. Aaa Zero 8/15/17 4,075 1,441,491
New Braunfels Ind. Sch. Dist.,
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/08 2,365 1,472,189
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/09 2,365 1,392,086
Cap. Apprec., P.S.F.G. Aaa Zero 2/01/12 2,365 1,154,948
Nueces Riv. Auth., Ref. Asarco Inc. Proj. Baa2 5.60 1/01/27 2,500 2,499,775
Round Rock Ind. Sch. Dist., Gen. Oblig., M.B.I.A. Aaa Zero 8/15/11 4,385 2,222,099
San Antonio Elec. & Gas Rev.,
F.G.I.C. Aaa Zero 2/01/09 5,000 2,943,100
F.G.I.C., Ser. B Aaa Zero 2/01/12 7,500 3,662,625
Tarrant Cnty. Hlth. Facs. Dev. Corp. Rev., Foundation
Proj. NR 10.25 9/01/19 5,000 5,319,550
Texas Mun. Pwr. Agcy. Rev., M.B.I.A. Aaa Zero 9/01/15 16,300 6,438,989
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Frances Hosp.,
Ser. A Baa2 5.625 7/01/13 1,680 1,682,318
--------------
37,767,134
- ---------------------------------------------------------------------------------------------------------------------------------
Utah--0.5%
Carbon Cnty. Solid Wste. Disp. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.45 7/01/17 1,500 1,642,950
Tooele Cnty Poll. Ctrl. Rev. Ref., Laidlaw
Environmental, Ser. A NR 7.55 7/01/27 4,000 4,404,360
--------------
6,047,310
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia--1.6%
Loudoun Cnty. Ind. Dev. Auth., Rev. NR 7.125 9/01/15 2,000 2,209,680
Norfolk Redev. & Hsg. Auth., Multifam. Rental Hsg. Fac.
Rev. NR 8.00 9/01/26 6,000 6,126,840
Pittsylvania Cnty. Ind. Dev. Auth. Rev. Multitrade NR 7.55 1/01/19 9,000 9,902,340
--------------
18,238,860
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--2.5%
Bellevue Conv. Ctr. Auth.,
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/10 870 482,467
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/11 1,200 625,092
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/12 1,300 634,855
King City, Oblig. Rev., M.B.I.A. Aaa Zero 2/01/14 1,385 600,135
Chelan Cnty. Pub. Util., Dist. No. 1, Columbia River
Rock, Hydro Elec. Sys. Rev., M.B.I.A. Aaa Zero 6/01/15 7,585 3,036,655
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-43

Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Washington (cont'd.)
Thurston Cnty. Sch. Dist. 333,
F.G.I.C. Aaa Zero 12/01/12 $ 6,830 $ 3,193,640
F.G.I.C., Ser. B Aaa Zero 12/01/11 6,415 3,202,175
Washington St. Ref., Ser. R, 97A Aa1 Zero 7/01/16 7,000 2,639,770
Washington St. Pub. Pwr. Supply Sys. Rev.,
Nuclear Proj. No. 1, Ser. B Aa1 7.25% 7/01/09 5,000(i) 5,897,400
Nuclear Proj. No. 3, M.B.I.A. Aaa Zero 7/01/17 5,000 1,747,450
Nuclear Proj. No. 3, Ser. B, M.B.I.A. Aaa 7.125 7/01/16 5,000 6,074,800
--------------
28,134,439
- ---------------------------------------------------------------------------------------------------------------------------------
West Virginia--1.0%
So. Charleston Ind. Dev. Rev., Union Carbide Chem. &
Plastics Co. Baa2 8.00 8/01/20 2,450 2,635,930
Weirton Poll. Ctrl. Rev., Weirton Steel Proj. B2 8.625 11/01/14 4,000 4,230,120
West Virginia St. Hsg. Dev. Fund Hsg. Fin., Ser. A,
F.H.A. Aaa 7.95 5/01/17 1,160 1,160,128
West Virginia St. Pkwys. Econ. Dev. & Tourism Auth.,
F.G.I.C. Aaa 7.423 5/16/19 3,250(d) 3,542,500
--------------
11,568,678
- ---------------------------------------------------------------------------------------------------------------------------------
Wisconsin--0.4%
Oconto Falls Cmnty. Dev. Auth. Dev. Rev., Oconto Falls
Tissue, Inc. Proj. NR 7.75 12/01/22 4,000 4,149,840
--------------
Total long-term investments (cost $1,016,977,321) 1,098,749,890
--------------
SHORT-TERM INVESTMENTS--0.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Florida
St. Lucie Cnty. Solid Wst. Disp. Rev., Ser. 93,
F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 100 100,000
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.2%
Plaquemines Parish Environmental Rev. Adj., Ref. BP.
Exploration & Oil, Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 1,500 1,500,000
West Baton Rouge Parish Ind. Dist. Pound3 Rev., Dow
Chemical Co. Proj., Ser. 95, F.R.D.D., A.M.T. P-1 4.40 5/01/98 700 700,000
--------------
2,200,000
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--0.3%
Brazos River Harbor Nav. Dist. Rev., Dow Chemical Co.,
Ser. A, F.R.D.D., A.M.T. P-1 4.40 5/01/98 2,600 2,600,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-44

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Brazos River Harbor Nav. Dist., Dow Chemical Co. Proj.,
Ser. 96, F.R.D.D., A.M.T. P-1 4.40% 5/01/98 $ 400 $ 400,000
Gulf Coast Ind. Dev. Auth. Solid Wste. Rev., Citgo
Petroleum, Ser. 95, F.R.D.D., A.M.T. VMIG1 4.40 5/01/98 400 400,000
--------------
3,400,000
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia
King George Cnty. Ind. Dev. Auth. Expt. Fac. Rev.,
F.R.D.D. A1+(b) 4.40 5/01/98 600 600,000
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--0.2%
Washington St. Hsg. Fin. Comm. Nonprofit Hsg. Rev.,
Emerald Height Proj., Ser. 90, F.R.D.D. A-1(b) 4.25 5/01/98 2,000 2,000,000
Ref. Panorama Cty. Proj., Ser. 97, F.R.D.D. VMIG1 4.25 5/01/98 200 200,000
--------------
2,200,000
--------------
Total short-term investments (cost $8,500,000) 8,500,000
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments--98.7%
(cost $1,025,477,321; Note 4) 1,107,249,890
Other assets in excess of liabilities--1.3% 13,980,703
--------------
Net Assets--100% $1,121,230,593
--------------
--------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
F.G.I.C.--Financial Guaranty Insurance Company
F.H.A.--Federal Housing Administration
F.R.D.D.--Floating Rate (Daily) Demand Note (g)
F.S.A.--Financial Security Assurance
G.N.M.A.--Government National Mortgage Association
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's Rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Issuer in default of interest payment. Non-income producing security.
(f) All or partial principal amount pledged as initial margin on financial
futures contracts.
(g) The maturity date shown is the later of the next date on which the security
can be redeemed at par or the next date on which the rate of interest is
adjusted.
(h) When-issued security.
(i) All or partial amount of principal segregated as collateral for financial
futures contracts and when-issued security.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-45

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $1,025,477,321)................................................................. $1,107,249,890
Cash........................................................................................................ 532,945
Interest receivable......................................................................................... 20,820,891
Receivable for investments sold............................................................................. 7,493,133
Receivable for Series shares sold........................................................................... 3,114,900
Due from broker - variation margin.......................................................................... 35,062
Other assets................................................................................................ 16,732
--------------
Total assets............................................................................................. 1,139,263,553
--------------
Liabilities
Payable for investments purchased........................................................................... 13,292,139
Payable for Series shares reacquired........................................................................ 2,008,464
Dividends payable........................................................................................... 1,788,096
Management fee payable...................................................................................... 410,722
Distribution fee payable.................................................................................... 323,222
Accrued expenses............................................................................................ 210,317
--------------
Total liabilities........................................................................................ 18,032,960
--------------
Net Assets.................................................................................................. $1,121,230,593
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 991,547
Paid-in capital in excess of par......................................................................... 1,063,404,578
--------------
1,064,396,125
Accumulated net realized loss on investments............................................................. (24,938,101)
Net unrealized appreciation of investments............................................................... 81,772,569
--------------
Net assets, April 30, 1998.................................................................................. $1,121,230,593
--------------
--------------
Class A:
Net asset value and redemption price per share
($421,515,355 DIVIDED BY 37,273,437 shares of beneficial interest issued and outstanding)............. $11.31
Maximum sales charge (3% of offering price).............................................................. .35
--------------
Maximum offering price to public......................................................................... $11.66
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($669,241,615 DIVIDED BY 59,185,536 shares of beneficial interest issued and outstanding)............. $11.31
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($20,554,428 DIVIDED BY 1,817,829 shares of beneficial interest issued and outstanding)............... $11.31
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($9,919,195 DIVIDED BY 877,903 shares of beneficial interest issued and outstanding).................. $11.30
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-46

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 71,328,838
--------------
Expenses
Management fee............................ 5,323,382
Distribution fee--Class A................. 381,735
Distribution fee--Class B................. 3,345,658
Distribution fee--Class C................. 111,993
Transfer agent's fees and expenses........ 450,000
Custodian's fees and expenses............. 152,000
Reports to shareholders................... 81,000
Registration fees......................... 64,000
Insurance expense......................... 29,000
Legal fees and expenses................... 18,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Miscellaneous............................. 8,437
--------------
Total expenses......................... 9,993,205
Less: Management fee waiver............... (535,931)
Custodian fee credit................... (4,478)
--------------
Net expenses........................... 9,452,796
--------------
Net investment income........................ 61,876,042
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... (5,710,322)
Financial futures contract transactions... (740,523)
--------------
(6,450,845)
--------------
Net change in unrealized appreciation of:
Investments............................... 50,351,593
--------------
Net gain on investments...................... 43,900,748
--------------
Net Increase in Net Assets
Resulting from Operations.................... $105,776,790
--------------
--------------
</TABLE>

PRUDENTIAL MUNICIPAL BOND FUND
HIGH YIELD SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income....... $ 61,876,042 $ 63,368,111
Net realized loss on
investment
transactions............. (6,450,845) (4,271,817)
Net change in unrealized
appreciation of
investments.............. 50,351,593 18,105,192
-------------- --------------
Net increase in net assets
resulting from
operations............... 105,776,790 77,201,486
-------------- --------------
Dividends and distributions
(Note 1):
Dividends from net
investment income
Class A.................. (23,016,599) (18,998,681)
Class B.................. (37,682,645) (43,873,295)
Class C.................. (804,495) (467,478)
Class Z.................. (372,303) (28,657)
-------------- --------------
(61,876,042) (63,368,111)
-------------- --------------
Distributions in excess of
net investment income
Class A.................. -- (39,610)
Class B.................. -- (82,405)
Class C.................. -- (965)
Class Z.................. -- (28)
-------------- --------------
-- (123,008)
-------------- --------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed............... 194,658,081 116,459,010
Net asset value of shares
issued in reinvestment of
dividends................ 27,600,737 28,109,609
Cost of shares reacquired... (156,797,816) (175,001,590)
-------------- --------------
Net increase (decrease) in
net assets from Series
share transactions....... 65,461,002 (30,432,971)
-------------- --------------
Total increase (decrease)...... 109,361,750 (16,722,604)
Net Assets
Beginning of year.............. 1,011,868,843 1,028,591,447
-------------- --------------
End of year.................... $1,121,230,593 $1,011,868,843
-------------- --------------
-------------- --------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-47

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--98.3%
- ---------------------------------------------------------------------------------------------------------------------------------
Alabama--0.7%
Huntsville Solid Wste. Disp. Auth., F.G.I.C. Aaa 7.00% 10/01/08 $ 2,000 $ 2,147,080
Jefferson Cnty. Swr. Rev. Wste., Ser. D, F.G.I.C. Aaa 5.75 2/01/22 1,200 1,249,716
------------
3,396,796
- ---------------------------------------------------------------------------------------------------------------------------------
Alaska--2.4%
Alaska St. Engy. Auth. Pwr. Rev., Bradley Lake Hydro, 1st
Ser., A.M.B.A.C. Aaa 7.25 7/01/16 2,000(g) 2,106,600
Anchorage Hosp. Rev., Sisters of Providence, A.M.B.A.C. Aaa 7.125 10/01/05 5,000 5,512,450
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/06 5,000 3,375,300
------------
10,994,350
- ---------------------------------------------------------------------------------------------------------------------------------
Arizona--1.9%
Maricopa Cnty. Ind. Dev. Auth. Rev.,
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.00 12/01/00 1,755 1,827,569
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,045(c) 1,149,155
Hosp. Facs., John C. Lincoln Hosp., F.S.A. Aaa 7.50 12/01/13 1,205 1,315,294
Maricopa Cnty. Unified Sch. Dist. No. 69, Paradise
Valley, Ser. E, F.G.I.C. Aaa 6.80 7/01/12 3,700 4,390,013
------------
8,682,031
- ---------------------------------------------------------------------------------------------------------------------------------
California--6.3%
California St. Pub. Wks. Brd.,
Comm. Coll. Proj., Ser. A, A.M.B.A.C. Aaa 5.625 3/01/16 2,000 2,078,700
Dept. of Corrections, A.M.B.A.C. Aaa 5.75 1/01/12 2,000 2,127,940
Contra Costa Wtr. Dist. Wtr. Rev., Ser. E, A.M.B.A.C. Aaa 6.25 10/01/12 1,455 1,648,253
Inland Empire Solid Wste. Fin. Auth., Landfill Impvt.
Fin., Proj. B, F.S.A. Aaa 6.00 8/01/16 2,000 2,117,580
Roseville Joint Union H.S. Dist., Ser. B, F.G.I.C. Aaa Zero 8/01/13 2,015 915,455
San Diego Cnty. Wtr. Auth. Wtr. Rev., Ctfs. of Part.,
F.G.I.C Aaa 7.037 4/26/06 5,800(d) 6,590,250
San Francisco City & Cnty. Arpt. Comm. Int'l. Arpt. Rev.,
Ser. 2, F.S.A. Aaa 4.75 5/01/29 5,755 5,243,265
So. Orange Cnty. Pub. Fin. Auth.,
Foothill Area Proj., F.G.I.C Aaa 8.00 8/15/08 2,000(g) 2,537,220
Foothill Area Proj., F.G.I.C. Aaa 6.50 8/15/10 2,725(g) 3,151,136
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-48

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
California (cont'd.)
Victor Valley Element. Sch. Dist.,
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/17 $ 3,550 $ 1,279,207
Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/01/18 3,700 1,258,925
------------
28,947,931
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--1.2%
Denver City & Cnty. Arpt. Rev., Ser. C, M.B.I.A. Aaa 5.60% 11/15/11 5,000 5,199,300
Jefferson Cnty. Sngl. Fam. Mtge. Rev., Ser. A, M.B.I.A. Aaa 8.875 10/01/13 435 464,141
------------
5,663,441
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--1.1%
Connecticut St. Res. Rec. Auth., Mid. Connecticut. Sys.,
Ser. A, M.B.I.A. Aaa 5.25 11/15/08 5,000 5,209,200
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--8.5%
Dist. of Columbia Hosp. Rev. Medlantic Hlthcare Grp.,
M.B.I.A. Aaa 5.875 8/15/19 3,500 3,652,110
M.B.I.A. Aaa 5.75 8/15/26 3,000(g) 3,093,750
Dist. of Columbia Met. Area Trans. Auth.,
Gross Rev., F.G.I.C. Aaa 6.00 7/01/09 2,400 2,655,336
Gross Rev., F.G.I.C. Aaa 6.00 7/01/10 1,500 1,659,960
Dist. of Columbia Ref.,
Ser. B, F.S.A. Aaa 5.50 6/01/10 7,565(g) 7,890,673
Ser. B, M.B.I.A. Aaa 6.00 6/01/18 4,460 4,866,083
Ser. B, M.B.I.A. Aaa 6.00 6/01/19 3,965 4,319,987
Dist. of Columbia,
Assoc. American Med. Colleges, A.M.B.A.C Aaa 5.375 2/15/27 4,500 4,483,260
Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.50 6/01/10 6,000(g) 6,797,040
------------
39,418,199
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--4.2%
Brevard Hlth. Facs. Auth. Rev., Holmes Reg'l. Med. Ctr.,
M.B.I.A. Aaa 5.60 10/01/10 6,000(g) 6,349,800
Dade Cnty. Edl. Facs. Auth. Rev. Ref., Ser. A, M.B.I.A. Aaa 5.625 4/01/06 3,000 3,200,010
Dade Cnty. Res. Rec., Facs. Rev. Ref., A.M.B.A.C. Aaa 5.10 10/01/04 3,355 3,458,468
Orange Cnty. Hlth. Facs. Auth. Rev. Hosp., Orlando Reg'l.
Hlthcare, Ser. A, M.B.I.A. Aaa 6.25 10/01/07 3,160 3,536,862
Palm Beach Cnty. Solid Wste. Auth. Rev. Ref., Ser. A,
A.M.B.A.C. Aaa 6.00 10/01/09 2,500 2,770,550
------------
19,315,690
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-49

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--2.6%
Atlanta Arpt. Facs. Rev., A.M.B.A.C. Aaa 6.50% 1/01/10 $ 2,000 $ 2,295,120
Georgia Mun. Elec. Auth.,
Proj. No. 1, A.M.B.A.C. Aaa 6.00 1/01/06 5,570 6,050,022
Pwr. Rev., M.B.I.A. Aaa 6.20 1/01/10 3,495(e) 3,891,613
------------
12,236,755
- ---------------------------------------------------------------------------------------------------------------------------------
Hawaii--3.3%
Hawaii St. Dept. Bud. & Fin. Spec. Purpose Rev., Hawaiian
Elec. Co. Inc., Ser. A, M.B.I.A. Aaa 5.65 10/01/27 15,000 15,199,950
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--11.7%
Arlington Hts. Park Dist. Cap. Apprec., Ser. E, F.G.I.C. Aaa Zero 12/01/13 4,175 1,825,143
Chicago Bd. Edl.
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/11 5,000 2,479,400
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/12 6,000 2,785,680
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/13 3,500 1,530,060
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/14 7,195 2,958,728
Cap. Apprec. Chicago Sch. Rfm., Ser. A, A.M.B.A.C. Aaa Zero 12/01/15 3,245 1,254,030
Chicago Bd. Edl. Sch. Ref., A.M.B.A.C. Aaa 5.75 12/01/27 10,000 10,394,200
Chicago Midway Arpt. Rev., Ser. B, M.B.I.A. Aaa 5.75 1/01/22 6,835 7,009,771
Chicago O'Hare Int'l. Arpt. Rev., Pass. Facs. Chrg., Ser.
A, A.M.B.A.C. Aaa 5.625 1/01/15 2,000 2,057,660
Chicago Park Dist., A.M.B.A.C. Aaa 5.30 1/01/15 3,000 3,008,760
Chicago Skyway Toll Brdg. Rev., M.B.I.A. Aaa 5.50 1/01/23 650 657,794
Chicago Wstewtr. Trans. Rev.
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/20 7,275 2,221,494
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/21 13,655 3,947,524
Cap. Apprec. Ref., Ser. A, M.B.I.A. Aaa Zero 1/01/24 13,695 3,349,386
Chicago Wtr. Rev. Cap. Apprec., F.G.I.C. Aaa Zero 11/01/16 3,055 1,121,490
Onterie Ctr. Hsg. Fin. Corp. Mtge. Rev.,
Ser. A, M.B.I.A. Aaa 7.00 7/01/12 1,575 1,673,579
Ser. A, M.B.I.A. Aaa 7.05 7/01/27 5,400 5,741,658
------------
54,016,357
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.0%
Marion Cnty. Hosp. Auth. Facs. Rev., A.M.B.A.C. Aaa 8.625 10/01/12 8,500(c)(g) 9,211,705
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-50

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Louisiana--0.5%
New Orleans, Gen. Oblig., Cap. Apprec., A.M.B.A.C. Aaa Zero 9/01/09 $ 4,000 $ 2,313,200
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--1.3%
Massachusetts Bay Trans. Auth. Gen. Sys., Ser. A,
M.B.I.A. Aaa 4.50% 3/01/26 4,000 3,474,000
Massachusetts St. Hlth. & Edl. Facs. Auth. Rev., Baystate
Med. Ctr., Ser. E, F.S.A. Aaa 6.00 7/01/26 2,475 2,617,610
------------
6,091,610
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--4.1%
Detroit Dwntwn. Dev., Ser. A, A.M.B.A.C. Aaa 5.75 7/15/15 1,820 1,903,702
Detroit Swr. Disp. Rev., Ser. 1993A, F.G.I.C. Aaa 7.263 7/01/23 6,500(d)(g) 6,833,125
Michigan St. Hosp. Fin. Auth. Rev., Mid. Michigan Oblig.,
M.B.I.A. Aaa 7.50 6/01/15 2,350(c) 2,550,126
Monroe Cnty. Poll. Ctrl. Rev., Detroit Edison Co., Proj.
1, Ser. I, A.M.B.A.C. Aaa 7.30 9/01/19 3,250 3,461,542
Saginaw Hosp. Fin. Auth., St. Luke's Hosp., Ser. C,
M.B.I.A. Aaa 6.50 7/01/11 4,000 4,278,440
------------
19,026,935
- ---------------------------------------------------------------------------------------------------------------------------------
Mississipi--0.6%
Harrison Cnty. Wste. Wtr. Mgmt. Dist. Rev., Wste. Wtr.
Treatmt., Facs. Auth., F.G.I.C. Aaa 6.50 2/01/06 2,400 2,576,832
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--0.3%
Missouri St. Hlth. & Edl. Facs. Rev.,
SSM Hlthcare, Ser. AA, M.B.I.A. NR 6.25 6/01/16 285(c) 309,806
SSM Hlthcare, Unref., Ser. AA, M.B.I.A. Aaa 6.25 6/01/16 1,215 1,304,315
------------
1,614,121
- ---------------------------------------------------------------------------------------------------------------------------------
Montana--0.5%
Forsyth Poll. Ctrl. Rev., Puget Sound Pwr. & Lt. Co., 1st
Mtge., Ser. A, A.M.B.A.C. Aaa 7.05 8/01/21 2,000 2,171,280
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--6.3%
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/15 1,425 595,180
Cap. Apprec., F.S.A. Aaa Zero 2/01/16 1,000 395,770
Cap. Apprec., F.S.A. Aaa Zero 2/01/17 1,425 533,335
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-51

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey (cont'd.)
East Orange Bd. Edl. Ctfs. Part.
Cap. Apprec., F.S.A. Aaa Zero 2/01/18 $ 2,845 $ 1,008,496
Cap. Apprec., F.S.A. Aaa Zero 8/01/18 1,425 492,038
Cap. Apprec., F.S.A. Aaa Zero 2/01/20 1,845 585,086
Cap. Apprec., F.S.A. Aaa Zero 8/01/21 2,845 834,837
Cap. Apprec., F.S.A. Aaa Zero 8/01/23 1,400 368,606
Jersey City Swr. Auth.,
A.M.B.A.C. Aaa 6.00% 1/01/10 2,585 2,854,615
A.M.B.A.C. Aaa 6.25 1/01/14 4,255 4,817,809
New Jersey Econ. Dev. Auth.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.875 7/01/11 5,900 6,270,756
Mkt. Trans. Facs. Rev., Sr. Lien, M.B.I.A. Aaa 5.80 7/01/09 3,340 3,567,454
Natural Gas Facs. Rev., M.B.I.A. Aaa 5.70 6/01/32 5,000 5,148,900
New Jersey Impvt. Auth. Rev., Util. Sys., M.B.I.A. Aaa 5.75 7/01/27 1,500 1,559,595
------------
29,032,477
- ---------------------------------------------------------------------------------------------------------------------------------
New York--11.5%
Erie Cnty. Wtr. Auth. Rev., A.M.B.A.C. Aaa Zero 12/01/17 770 189,682
Islip Res. Rec., Ser. B, A.M.B.A.C. Aaa 7.20 7/01/10 1,750 2,095,887
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 5,000 5,291,600
New York City Mun. Wtr. Fin. Auth., Wtr. & Swr. Sys.
Rev., M.B.I.A. Aaa 5.75 6/15/26 5,000 5,182,750
New York City,
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/07 4,000 2,604,800
Cap. Apprec., Ser. G, M.B.I.A. Aaa Zero 8/01/08 3,325 2,030,212
Ser. D, M.B.I.A. Aaa 5.25 8/01/21 2,500 2,466,750
Ser. G, M.B.I.A. Aaa 5.75 2/01/14 3,000 3,134,040
New York St. Dorm. Auth. Rev., Montefiore Med. Ctr.,
A.M.B.A.C. Aaa 6.00 8/01/08 3,400 3,738,606
New York St. Envir. Facs. Corp.,
Poll. Ctrl. Rev. Aaa 5.70 7/15/12 3,375 3,567,442
Poll. Ctrl. Rev. Aaa 5.75 7/15/13 1,060 1,132,239
Poll. Ctrl. Rev. Aaa 5.80 7/15/14 3,755 3,998,362
New York St. Thrwy. Auth. Gen. Rev.,
Ser. D Aa3 5.40 1/01/11 5,370 5,570,730
Ser. D Aa3 5.50 1/01/12 3,865 4,016,508
Port Auth. New York & New Jersey Cons., Ser. 99, F.G.I.C. Aaa 5.90 11/01/11 7,665 8,114,246
------------
53,133,854
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-52

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--3.9%
Cleveland City Sch. Dist.,
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.50% 6/01/06 $ 6,465 $ 6,836,026
Rev. Antic. Nts., A.M.B.A.C. Aaa 5.75 6/01/07 5,870 6,325,806
Kent City Sch. Dist., F.G.I.C. Aaa 5.75 12/01/21 1,000 1,043,820
Lorain Cnty. Hosp. Rev., Catholic Hlthcare Partners,
M.B.I.A. Aaa 5.50 9/01/27 4,000 4,046,800
------------
18,252,452
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--1.5%
Norman Reg'l. Hosp. Auth., Rev. Ref., Ser. A, M.B.I.A. Aaa 5.50 9/01/11 4,110 4,267,290
Oklahoma City Arpt. Trust, Jr. Lien, Ser. 24, A.M.B.A.C. Aaa 5.75 2/01/18 2,620 2,690,399
------------
6,957,689
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--1.3%
Philadelphia Mun. Auth. Rev., Criminal Justice Ctr., Ser.
A, M.B.I.A. Aaa 6.90 11/15/03 3,000 3,299,010
Philadelphia, Sch. Dist., Ser. B, A.M.B.A.C. Aaa 5.375 4/01/27 2,500 2,504,275
------------
5,803,285
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--3.1%
Puerto Rico Comm., M.B.I.A. Aaa 4.875 7/01/23 3,000 2,823,690
Puerto Rico Gen. Oblig., M.B.I.A. Aaa 6.25 7/01/13 1,250 1,421,825
Puerto Rico Pub. Bldgs. Auth. Rev., Gov't. Facs., Ser. A,
A.M.B.A.C. Aaa 6.25 7/01/13 1,700 1,933,682
Puerto Rico Tel. Auth. Rev.,
Ser. I, M.B.I.A. Aaa 6.667 1/25/07 4,100(d) 4,407,500
Ser. I, M.B.I.A. Aaa 6.915 1/16/15 3,800(d) 3,952,000
------------
14,538,697
- ---------------------------------------------------------------------------------------------------------------------------------
South Dakota--2.8%
So. Dakota Hsg. Dev. Auth., Homeownership Mtge., Ser. F Aa1 5.80 5/01/28 12,620 12,960,866
- ---------------------------------------------------------------------------------------------------------------------------------
Tennessee--1.2%
Metro. Gov't. Nashville & Davidson Cnty. Wtr. & Swr.
Rev., A.M.B.A.C. Aaa 8.216 1/01/22 5,000(d) 5,731,250
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--5.4%
Austin Util. Sys. Rev. Comb., Ser. A, M.B.I.A. Aaa 4.875 11/15/10 5,500 5,466,725
Austin Util. Sys. Rev., M.B.I.A. Aaa Zero 5/15/03 8,000 6,354,480
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-53

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Texas (cont'd.)
Brazos Rvr. Auth. Rev., Houston Lt. & Pwr., Ser. B, 1st
Mtge., F.G.I.C. Aaa 7.20% 12/01/18 $ 1,000 $ 1,061,030
Houston Arpt. Sys. Rev. Aaa 7.20 7/01/13 3,900 4,600,323
Houston Arpt. Sys. Rev., Spec. Facs. People Mover, Ser.
A, F.S.A. Aaa 6.00 7/15/05 3,255 3,508,857
Keller Ind. Sch. Dist., P.S.F.G. Aaa Zero 8/15/15 4,945 1,958,072
Texas Wtr. Res. Fin. Auth. Rev., A.M.B.A.C. Aaa 7.50 8/15/13 1,985 2,067,298
------------
25,016,785
- ---------------------------------------------------------------------------------------------------------------------------------
Virginia--3.7%
Chesapeake Bay Brdg. & Tunn. Comm., Dist. Rev., F.G.I.C. Aaa 5.875 7/01/10 5,000 5,386,850
Richmond Met. Auth. Expwy. Rev. Ref., F.G.I.C. Aaa 5.25 7/15/22 4,265 4,299,675
Virginia Beach Hosp. Facs. Rev.,
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/10 1,220 1,352,882
1st Mtge., A.M.B.A.C. Aaa 6.00 2/15/13 1,455 1,608,925
Virginia Coll. Bldg. Auth. Edl. Facs. Rev., M.B.I.A. Aaa 5.25 1/01/26 4,275 4,324,718
------------
16,973,050
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--4.4%
Washington St. Hlthcare Facs. Auth. Rev., Yakima Valley
Memorial Hosp. Assoc. AAA(b) 5.25 12/01/20 2,500 2,435,375
Washington St. Pub. Pwr. Supply Sys.,
Nuclear Proj. No. 1, Ser. A, M.B.I.A. Aaa 5.75 7/01/10 7,000 7,436,940
Nuclear Proj. No. 2, Ser. A, M.B.I.A. Aaa Zero 7/01/11 5,210 2,622,818
Nuclear Proj. No. 2, Ser. B, F.G.I.C. Aaa 7.25 7/01/03 3,000(c) 3,245,040
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa 7.00 7/01/05 2,000(c) 2,130,900
Nuclear Proj. No. 3, Ser. B, F.G.I.C. Aaa Zero 7/01/08 4,500 2,717,955
------------
20,589,028
------------
Total long-term investments (cost $434,670,225) 455,075,816
------------
SHORT-TERM INVESTMENTS--0.9%
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--0.1%
Dist. of Columbia, Gen. Oblig., Ser. 92A-4, F.R.D.D. VMIG1 4.35 5/01/98 500 500,000
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--0.0%
Will County Solid Wste. Disp. Rev., Daily BASF Corp.
Proj.,
Ser. 97, F.R.D.D., A.M.T. P-1 4.25 5/01/98 100 100,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-54

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
New Mexico--0.6%
Hurley Cnty., Poll. Ctrl. Rev., Ser. 85, F.R.D.D. P-1 4.25% 5/01/98 $ 2,800 $ 2,800,000
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--0.2%
Gulf Coast Wste. Disp. Auth., Poll. Ctrl. Rev., Ser. 94,
F.R.D.D., A.M.T. VMIG1 4.35 5/01/98 600 600,000
------------
Total short-term investments (cost $4,000,000) 4,000,000
------------
- ---------------------------------------------------------------------------------------------------------------------------------
Total Investments--99.2%
(cost $438,670,225; Note 4) 459,075,816
Other assets in excess of liabilities--0.8% 3,629,791
------------
Net Assets--100% $462,705,607
------------
------------
</TABLE>
- ---------------
(a) The following abbreviations are used in portfolio descriptions:
A.M.B.A.C.--American Municipal Bond Assurance Corporation
A.M.T.--Alternative Minimum Tax
F.G.I.C.--Financial Guaranty Insurance Company
F.R.D.D.--Floating Rate (Daily) Demand Note (f)
F.S.A.--Financial Security Assurance
M.B.I.A.--Municipal Bond Insurance Association
P.S.F.G.--Public School Fund Guaranty
(b) Standard & Poor's rating.
(c) Prerefunded issues are secured by escrowed cash and direct U.S. guaranteed
obligations.
(d) Inverse floating rate bond. The coupon is inversely indexed to a floating
interest rate. The rate shown is the rate at year end.
(e) Principal amount pledged as initial margin on financial futures contracts.
(f) The maturity date shown is the later of the next date on which the security
can be redeemed at par or the next date on which the rate of interest is
adjusted.
(g) All or partial amount of principal segregated as collateral for financial
futures contracts.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-55

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $438,670,225)................................................................... $459,075,816
Cash........................................................................................................ 27,338
Interest receivable......................................................................................... 6,179,023
Receivable for Series shares sold........................................................................... 73,218
Other assets................................................................................................ 9,084
--------------
Total assets............................................................................................. 465,364,479
--------------
Liabilities
Payable for Series shares reacquired........................................................................ 1,103,751
Dividends payable........................................................................................... 599,998
Due to broker-variation margin.............................................................................. 405,337
Accrued expenses............................................................................................ 233,850
Management fee payable...................................................................................... 200,112
Distribution fee payable.................................................................................... 115,824
--------------
Total liabilities........................................................................................ 2,658,872
--------------
Net Assets.................................................................................................. $462,705,607
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 418,602
Paid-in capital in excess of par......................................................................... 439,345,140
--------------
439,763,742
Accumulated net realized gain on investments............................................................. 2,430,211
Net unrealized appreciation of investments............................................................... 20,511,654
--------------
Net assets, April 30, 1998.................................................................................. $462,705,607
--------------
--------------
Class A:
Net asset value and redemption price per share
($224,409,371 DIVIDED BY 20,312,259 shares of beneficial interest issued and outstanding)............. $11.05
Maximum sales charge (3.0% of offering price)............................................................ .34
--------------
Maximum offering price to public......................................................................... $11.39
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($236,369,629 DIVIDED BY 21,373,644 shares of beneficial interest issued and outstanding)............. $11.06
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($1,508,667 DIVIDED BY 136,421 shares of beneficial interest issued and outstanding).................. $11.06
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($417,940 DIVIDED BY 37,833 shares of beneficial interest issued and outstanding)..................... $11.05
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-56

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $ 26,886,125
--------------
Expenses
Management fee............................ 2,469,913
Distribution fee--Class A................. 222,115
Distribution fee--Class B................. 1,352,766
Distribution fee--Class C................. 8,567
Transfer agent's fees and expenses........ 301,000
Custodian's fees and expenses............. 97,000
Reports to shareholders................... 50,000
Registration fees......................... 41,000
Insurance expense......................... 16,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 11,000
Miscellaneous............................. 5,599
--------------
Total expenses......................... 4,602,960
Less: Management fee waiver............... (85,444)
Custodian fee credit................... (5,707)
--------------
Net expenses........................... 4,511,809
--------------
Net investment income........................ 22,374,316
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 10,397,180
Financial futures contract transactions... (2,978,111)
--------------
7,419,069
--------------
Net change in unrealized
appreciation on:
Investments............................... 10,580,044
Financial futures contracts............... 297,750
--------------
10,877,794
--------------
Net gain on investments...................... 18,296,863
--------------
Net Increase in Net Assets
Resulting from Operations.................... $ 40,671,179
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INSURED SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........ $ 22,374,316 $ 25,911,892
Net realized gain on
investment transactions... 7,419,069 12,131,022
Net change in unrealized
appreciation
(depreciation) of
investments............... 10,877,794 (7,713,454)
------------- -------------
Net increase in net assets
resulting from
operations................ 40,671,179 30,329,460
------------- -------------
Dividends and distributions
(Note 1):
Dividends from net investment
income
Class A................... (10,553,524) (9,267,489)
Class B................... (11,765,355) (16,602,381)
Class C................... (46,954) (41,775)
Class Z................... (8,483) (247)
------------- -------------
(22,374,316) (25,911,892)
------------- -------------
Dividends in excess of net
investment income
Class A................... (80,333) (117,523)
Class B................... (90,260) (180,111)
Class C................... (469) (467)
Class Z................... (60) --
------------- -------------
(171,122) (298,101)
------------- -------------
Distributions from net
capital gains
Class A................... (4,980,680) (2,135,002)
Class B................... (5,596,092) (3,272,015)
Class C................... (29,102) (8,473)
Class Z................... (3,703) (2)
------------- -------------
(10,609,577) (5,415,492)
------------- -------------
Series share transactions (net
of share conversions) (Note
5):
Net proceeds from shares
subscribed................ 17,849,201 201,450,948
Net asset value of shares
issued in reinvestment of
dividends and
distributions............. 19,222,401 17,841,830
Cost of shares reacquired.... (89,200,577) (294,754,828)
------------- -------------
Net decrease in net assets
from Series share
transactions.............. (52,128,975) (75,462,050)
------------- -------------
Total decrease.................. (44,612,811) (76,758,075)
Net Assets
Beginning of year............... 507,318,418 584,076,493
------------- -------------
End of year..................... $ 462,705,607 $ 507,318,418
------------- -------------
------------- -------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-57

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
LONG-TERM INVESTMENTS--97.7%
- ---------------------------------------------------------------------------------------------------------------------------------
Alaska--4.8%
Alaska Ind. Dev. & Expt. Auth., Revolving Loan Fund A2 5.40% 4/01/01 $ 945 $ 967,992
No. Slope Boro., Cap. Apprec., Ser. A, M.B.I.A. Aaa Zero 6/30/07 1,430 915,886
------------
1,883,878
- ---------------------------------------------------------------------------------------------------------------------------------
Colorado--2.6%
Eaglebend Affordable Hsg. Corp., Multifam. Rev. NR 5.75 7/01/07 1,000 1,019,170
- ---------------------------------------------------------------------------------------------------------------------------------
Connecticut--5.4%
Conn. Spec. Tax Oblig. Rev., Ser. A AA-(b) 7.00 6/01/03 1,000(c) 1,086,790
Conn. St. Hlth. & Edl. Facs. Auth. Rev. Baa2 5.125 7/01/07 1,000 992,350
------------
2,079,140
- ---------------------------------------------------------------------------------------------------------------------------------
District of Columbia--6.6%
Dist. Columbia Hsg. Fin. Agcy. Mtge. Rev.
Amt. Sngl. Fam., Ser. B AAA(b) 5.25 12/01/08 440 447,128
Amt. Sngl. Fam., Ser. B AAA(b) 5.30 12/01/09 315 319,309
Dist. of Columbia Ref., Ser. B, M.B.I.A. Aaa 6.00 6/01/13 1,000 1,090,550
Dist. of Columbia Rev., America Geophysical Union, Ser.
199 BBB-(b) 5.50 9/01/03 700 709,912
------------
2,566,899
- ---------------------------------------------------------------------------------------------------------------------------------
Florida--1.3%
Palm Beach Cnty. Hlth. Facs. Auth. Rev., Abbey Delray So.
Proj. BBB(b) 5.30 10/01/07 500 501,865
- ---------------------------------------------------------------------------------------------------------------------------------
Georgia--2.4%
Burke Cnty. Dev. Auth., Oglethorpe Pwr. Co., M.B.I.A. Aaa 7.50 1/01/03 862 927,305
- ---------------------------------------------------------------------------------------------------------------------------------
Illinois--1.2%
Illinois Hlth. Facs. Auth. Rev., Edward Hosp., Ser. A A2 5.75 2/15/09 450 466,524
- ---------------------------------------------------------------------------------------------------------------------------------
Indiana--2.7%
Univ. Southern Indiana Rev. Student Fee., Ser. F, F.G.I.C. Aaa 5.50 10/01/13 1,000 1,045,580
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-58

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Massachusetts--5.1%
Massachusetts Edl. Fing Auth. Ed. Ln. Rev., Iss. G., Ser.
A, M.B.I.A. AAA(b) 5.10% 12/01/13 $ 1,000 $ 970,660
Massachusetts St. Hsg. Fin. Agcy. Hsg. Dev., Ser. A,
M.B.I.A Aaa 5.15 6/01/11 1,000 996,190
------------
1,966,850
- ---------------------------------------------------------------------------------------------------------------------------------
Michigan--1.4%
Michigan Mun. Bond Auth. Rev., Wayne Cnty. Proj., M.B.I.A. Aaa 7.40 12/01/02 500 547,675
- ---------------------------------------------------------------------------------------------------------------------------------
Missouri--1.3%
Clayton Sch. Dist., Cap. Apprec., Ser. A, F.S.A. Aaa Zero 2/01/07 750 494,325
- ---------------------------------------------------------------------------------------------------------------------------------
New Jersey--18.4%
Brick Twnshp., Mun. Util. Auth. Rev., F.G.I.C. Aaa 5.50 12/01/03 1,295 1,362,858
New Jersey Econ. Dev. Auth. Rev.,
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.75 7/01/06 950 1,018,144
Mkt. Trans. Facs. Rev., M.B.I.A. Aaa 5.80 7/01/07 1,000 1,071,480
Performing Arts Ctr., A.M.B.A.C. Aaa 6.00 6/15/08 1,410 1,553,862
So. Reg'l. High Sch. Dist., M.B.I.A. Aaa 5.50 9/01/06 1,010 1,074,438
West Windsor Plainsboro Sch., F.G.I.C. Aaa 5.25 12/01/05 1,000 1,046,400
------------
7,127,182
- ---------------------------------------------------------------------------------------------------------------------------------
New York--8.0%
Met. Trans. Auth. N.Y. Trans. Facs. Rev., F.S.A. Aaa 5.75 7/01/11 675 714,366
New York, N.Y., Ser. F A3 5.50 8/01/07 1,000 1,040,350
New York St. Env. Facs. Corp., Poll. Ctrl. Rev. Aaa 5.80 1/15/14 1,280 1,362,957
------------
3,117,673
- ---------------------------------------------------------------------------------------------------------------------------------
Ohio--1.4%
Ohio St. Bldg. Auth., Admin. Bldg. Fund Proj., M.B.I.A. Aaa 5.60 10/01/06 500 534,555
- ---------------------------------------------------------------------------------------------------------------------------------
Oklahoma--6.0%
Oklahoma St. Ind. Auth. Rev. Hosp., Deaconess Hlthcare.,
Ser. A Baa2 5.50 10/01/12 1,250 1,242,562
Oklahoma St. Ind. Auth. Rev. Hlth. Sys., Integris Bapt.,
A.M.B.A.C. Aaa 6.00 8/15/09 1,000 1,094,810
------------
2,337,372
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-59

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Portfolio of Investments as of April 30, 1998 INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Interest Maturity Amount Value
Description (a) (Unaudited) Rate Date (000) (Note 1)
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
Pennsylvania--10.4%
Clarion Cnty. Hosp. Auth. Rev., Ref. Clarion Hosp. Proj. BBB-(b) 5.60% 7/01/10 $ 685 $ 694,597
Montgomery Cnty. Redev. Auth., Multifam. Hsg. Rev., Ser. A NR 5.75 7/01/99 780 788,011
Pennsylvania St. Ctfs. of Part., Ser. A, F.S.A. Aaa 6.25 11/01/06 600 645,768
Pennsylvania St. Higher Edl. Facs. Auth., Hlth. Svs. Rev.,
M.B.I.A. Aaa 5.70 11/15/11 755 812,697
Philadelphia Hosp. Auth. & Higher Edl. Auth., Childrens
Seashore House, Ser. A A-(b) 7.00 8/15/03 1,000 1,088,010
------------
4,029,083
- ---------------------------------------------------------------------------------------------------------------------------------
Puerto Rico--2.1%
Puerto Rico Comnwlth., Gen. Oblig., Ser. A, M.B.I.A. Aaa 6.25 7/01/10 750 806,310
- ---------------------------------------------------------------------------------------------------------------------------------
Rhode Island--2.8%
Rhode Island St., Ref. Cons. Cap. Dev. Loan, M.B.I.A. Aaa 6.00 8/01/06 1,000 1,092,290
- ---------------------------------------------------------------------------------------------------------------------------------
Texas--4.5%
San Antonio Elec. & Gas Rev., Ser. A, F.G.I.C. Aaa Zero 2/01/05 1,000 727,370
Tyler Tex. Hlth. Facs. Dev. Corp., Mother Francis Hosp.,
Ser. A Baa2 5.50 7/01/09 1,000 1,004,350
------------
1,731,720
- ---------------------------------------------------------------------------------------------------------------------------------
Utah--2.7%
Utah St. Brd. of Regents, Student Loan Rev., Ser. F,
A.M.B.A.C. Aaa 7.00 11/01/01 1,000 1,064,200
- ---------------------------------------------------------------------------------------------------------------------------------
Washington--2.7%
Wash. St. Pub. Pwr. Supp. Sys., Nuclear Proj. No. 3, Ser.
B Aa1 7.00 7/01/99 1,000 1,034,100
- ---------------------------------------------------------------------------------------------------------------------------------
Wyoming--3.9%
Wyoming Cmnty. Dev. Auth. Hsg. Rev. Amt., Ser. 5 Aa2 5.60 12/01/06 1,450 1,526,401
------------
Total long-term investments (cost $36,635,565) 37,900,097
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-60

The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-61

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Statement of Assets and Liabilities INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets April 30, 1998
<S> <C>
Investments, at value (cost $37,235,565).................................................................... $ 38,500,097
Interest receivable......................................................................................... 602,522
Receivable for Series shares sold........................................................................... 17,063
Other assets................................................................................................ 852
--------------
Total assets............................................................................................. 39,120,534
--------------
Liabilities
Bank overdraft.............................................................................................. 23,529
Accrued expenses............................................................................................ 127,453
Payable for Series shares reacquired........................................................................ 115,603
Dividends payable........................................................................................... 40,096
Management fee payable...................................................................................... 15,692
Distribution fee payable.................................................................................... 11,796
--------------
Total liabilities........................................................................................ 334,169
--------------
Net Assets.................................................................................................. $ 38,786,365
--------------
--------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 35,867
Paid-in capital in excess of par......................................................................... 37,195,390
--------------
37,231,257
Accumulated net realized gain on investments............................................................. 290,576
Net unrealized appreciation on investments............................................................... 1,264,532
--------------
Net assets, April 30, 1998.................................................................................. $ 38,786,365
--------------
--------------
Class A:
Net asset value and redemption price per share
($13,125,685 DIVIDED BY 1,213,932 shares of beneficial interest issued and outstanding)............... $10.81
Maximum sales charge (3% of offering price).............................................................. .33
--------------
Maximum offering price to public......................................................................... $11.14
--------------
--------------
Class B:
Net asset value, offering price and redemption price per share
($24,017,088 DIVIDED BY 2,220,773 shares of beneficial interest issued and outstanding)............... $10.81
--------------
--------------
Class C:
Net asset value, offering price and redemption price per share
($449,061 DIVIDED BY 41,523 shares of beneficial interest issued and outstanding)..................... $10.81
--------------
--------------
Class Z:
Net asset value, offering price and redemption price per share
($1,194,531 DIVIDED BY 110,471 shares of beneficial interest issued and outstanding).................. $10.81
--------------
--------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-62

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
Net Investment Income April 30, 1998
<S> <C>
Income
Interest.................................. $2,205,779
--------------
Expenses
Management fee............................ 207,968
Distribution fee--Class A................. 13,591
Distribution fee--Class B................. 135,876
Distribution fee--Class C................. 2,856
Reports to shareholders................... 87,000
Custodian's fees and expenses............. 72,000
Registration fees......................... 62,000
Transfer agent's fees and expenses........ 38,000
Audit fee................................. 15,000
Trustees' fees and expenses............... 13,000
Legal fees and expenses................... 10,500
Miscellaneous............................. 6,554
--------------
Total expenses......................... 664,345
Less: Management fee waiver............... (7,346)
Custodian fee credit................... (185)
--------------
Net expenses........................... 656,814
--------------
Net investment income........................ 1,548,965
--------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions................... 535,746
Financial futures contract transactions... (196,033)
--------------
339,713
--------------
Net change in unrealized appreciation/depreciation on:
Investments............................... 829,293
Financial futures contracts............... (12,906)
--------------
816,387
--------------
Net gain on investments...................... 1,156,100
--------------
Net Increase in Net Assets
Resulting from Operations.................... $2,705,065
--------------
--------------
</TABLE>
PRUDENTIAL MUNICIPAL BOND FUND
INTERMEDIATE SERIES
Statement of Changes in Net Assets
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Increase (Decrease) Year Ended April 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income........... $ 1,548,965 $ 1,958,229
Net realized gain on investment
transactions................. 339,713 478,036
Net change in unrealized
appreciation
(depreciation) of
investments.................. 816,387 (699,669)
----------- ------------
Net increase in net assets
resulting from operations.... 2,705,065 1,736,596
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A...................... (542,230) (579,475)
Class B...................... (975,783) (1,371,478)
Class C...................... (12,672) (5,456)
Class Z...................... (18,280) (1,820)
----------- ------------
(1,548,965) (1,958,229)
----------- ------------
Distributions in excess of net
investment income
Class A...................... -- (9,615)
Class B...................... -- (22,423)
Class C...................... -- (75)
Class Z...................... -- (3)
----------- ------------
-- (32,116)
----------- ------------
Distributions from net capital
gains
Class A...................... (66,647) --
Class B...................... (130,950) --
Class C...................... (2,322) --
Class Z...................... (1,731) --
----------- ------------
(201,650) --
----------- ------------
Series share transactions (net of
share conversions) (Note 5):
Net proceeds from shares
subscribed................... 3,202,633 5,261,896
Net asset value of shares issued
in reinvestment of
dividends.................... 1,116,810 1,242,265
Cost of shares reacquired....... (10,710,780) (15,354,228)
----------- ------------
Net decrease in net assets from
Series share transactions.... (6,391,337) (8,850,067)
----------- ------------
Total decrease..................... (5,436,887) (9,103,816)
Net Assets
Beginning of year.................. 44,223,252 53,327,068
----------- ------------
End of year........................ $38,786,365 $ 44,223,252
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-63

<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Prudential Municipal Bond Fund (the 'Fund') is registered under the Investment
Company Act of 1940 as a diversified, open-end management investment company.
The Fund was organized as an unincorporated business trust in Massachusetts on
November 3, 1986 and consists of three series: the High Yield Series, the
Insured Series and the Intermediate Series. Investment operations for Class A,
Class B, Class C and Class Z shares of each series commenced on January 22,
1990, September 17, 1987, August 1, 1994 and September 16, 1996, respectively.

The investment objectives of the series are as follows: (i) the objective of the
High Yield Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes, (ii) the objective of the Insured and
Intermediate Series is to provide the maximum amount of income that is eligible
for exclusion from federal income taxes consistent with the preservation of
capital. The ability of issuers of debt securities held by the Fund to meet
their obligations may be affected by economic and political developments in a
specific state, region or industry.
- ------------------------------------------------------------
Note 1. Accounting Policies

Securities Valuation: Municipal securities (including commitments to purchase
such securities on a 'when-issued' basis) are valued on the basis of prices
provided by a pricing service which uses information with respect to
transactions in bonds, quotations from bond dealers, market transactions in
comparable securities and various relationships between securities in
determining values. If market quotations are not readily available from such
pricing service, a security is valued at its fair value as determined under
procedures established by the Trustees.

Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.

Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of debt securities at a set
price for delivery on a future date. Upon entering into a financial futures
contract, the Fund is required to pledge to the broker an amount of cash and/or
other assets equal to a certain percentage of the contract amount. This amount
is known as the 'initial margin.' Subsequent payments, known as 'variation
margin,' are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.

The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.

Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost basis of the purchase in
determining whether the Fund has realized a gain or loss. The difference between
the premium and the amount received or paid on effecting a closing purchase or
sale transaction is also treated as a realized gain or loss. Gain or loss on
purchased options is included in net realized gain (loss) on investment
transactions.

The Fund, as writer of an option, has no control over whether the underlying
securities may be sold (called) or purchased (put). As a result, the Fund bears
the market risk of an unfavorable change in the price of the security underlying
the written option. The Fund, as purchaser of an option, bears the risk of the
potential inability of the counterparties to meet the terms of their contracts.

Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of securities are
calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and accretes original issue discount
on portfolio securities as adjustments to interest income. Net investment
income, other than distribution fees, and realized and unrealized gains or
losses are allocated daily to each class of shares based upon the relative
proportion of net assets of each class at the beginning of the day. Expenses are
recorded on the accrual basis which may require the use of certain estimates by
management.
- --------------------------------------------------------------------------------
B-64

<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
Federal Income Taxes: For federal income tax purposes, each series in the Fund
is treated as a separate tax paying entity. It is the intent of each series to
continue to meet the requirements of the Internal Revenue Code applicable to
regulated investment companies and to distribute all net income to shareholders.
For this reason no federal income tax provision is required.

Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.

Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with Statement of Position 93-2:
Determination, Disclosure, and Financial Statement Presentation of Income,
Capital Gain, and Return of Capital Distributions by Investment Companies. For
the fiscal year ended April 30, 1998, the effect of applying this statement was
to increase undistributed net investment income and decrease accumulated net
realized gain by $171,122 for the Insured Series.

Custody Fee Credits: The Fund has an arrangement with its custodian bank,
whereby uninvested monies earn credits which reduce the fees charged by the
custodian.
- ------------------------------------------------------------
Note 2. Agreements

The Fund has a management agreement with Prudential Investments Fund Management
LLC ('PIFM'). Pursuant to this agreement, PIFM has responsibility for all
investment advisory services and supervises the subadviser's performance of such
services. PIFM has entered into a subadvisory agreement with The Prudential
Investment Corporation ('PIC'), doing business as Prudential Investments ('PI,'
the Subadviser or the investment adviser); PIC furnishes investment advisory
services in connection with the management of the Fund. PIFM pays for the cost
of the subadviser's services, the compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.

The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the average daily net assets of each series up to $1
billion and .45 of 1% of the average daily net assets of each series in excess
of $1 billion. PIFM has agreed to voluntarily waive a portion of each series'
management fee, which amounted to $535,931, $85,444 and $7,346 for the High
Yield Series, Insured Series and Intermediate Series, respectively. Such amounts
represented .05 of 1% of the average daily net assets or $.005 per share for the
High Yield Series and .02 of 1% of the average daily net assets or $.002 per
share for the Insured Series and Intermediate Series. Effective September 1,
1997, PIFM eliminated its management fee waiver for the Insured Series and
Intermediate Series.

The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, Class B, Class C and
Class Z shares of the Fund. The Fund compensates PSI for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution (the 'Class A, B and C Plans'), regardless of expenses actually
incurred by PSI. The distribution fees are accrued daily and payable monthly. No
distribution or service fees are paid to PSI as distributor of the Class Z
shares of the Fund. Effective July 1, 1998, Prudential Investment Management
Services LLC will become the distributor of the Fund and will serve the Fund
under the same terms and conditions as under the arrangement with PSI.

Pursuant to the Class A, B and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1%, .50 of 1%
and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Plans were .10 of 1%, .50 of 1% and .75 of
1% of the average daily net assets of the Class A, B and C shares, respectively,
for the year ended April 30, 1998.

PSI has advised the Fund that it received approximately $529,300 ($493,600-High
Yield Series; $30,400-Insured Series; $5,300-Intermediate Series) in front-end
sales charges resulting from sales of Class A shares during the year ended April
30, 1998. From these fees, PSI paid such sales charges to affiliated
broker-dealers which in turn paid commissions to salespersons and incurred other
distribution costs.

PSI has advised the Fund that for the year ended April 30, 1998, it received
approximately $1,320,700 ($866,900-High Yield Series; $388,200-Insured Series;
$65,600-Intermediate Series) in contingent deferred sales charges imposed upon
certain redemptions by Class B and C shareholders.

PSI, PIC and PIFM are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.

The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative
- --------------------------------------------------------------------------------
B-65

<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
source of funding for capital share redemptions. The Fund has not borrowed any
amounts pursuant to the Agreement during the year ended April 30, 1998. The
Funds pay a commitment fee at an annual rate of .055 of 1% on the unused portion
of the credit facility. The commitment fee is accrued and paid quarterly on a
pro rata basis by the Funds. The Agreement expired on December 30, 1997 and has
been extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates

Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended April 30, 1998, the
Fund incurred fees of approximately $609,100 ($361,000-High Yield Series;
$221,700-Insured Series; $26,400-Intermediate Series) for the services of PMFS.
As of April 30, 1998, approximately $51,600 ($31,100-High Yield Series;
$18,300-Insured Series; $2,200-Intermediate Series) of such fees were due to
PMFS. Transfer agent fees and expenses in the Statement of Operations also
include certain out of pocket expenses paid to nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities

Purchases and sales of portfolio securities, excluding short-term investments,
for the year ended April 30, 1998, were as follows:
<TABLE>
<CAPTION>
Series Purchases Sales
- -------------------------------- ------------ ------------
<S> <C> <C>
High Yield...................... $208,053,727 $139,078,918
Insured......................... 404,690,101 456,797,559
Intermediate.................... 21,888,177 28,523,204
</TABLE>

At April 30, 1998, the High Yield Series and the Insured Series sold 100,000 and
284,000 financial futures contracts, respectively of U.S. Treasury Bonds
expiring in June 1998.

The values of these financial futures contracts at April 30, 1998 were as
follows:
<TABLE>
<CAPTION>
Financial Futures
Contracts Sold
--------------------------
High Yield Insured
Series Series
----------- -----------
<S> <C> <C>
Value at disposition.............. $12,003,625 $34,421,156
Value at April 30, 1998........... 12,003,625 34,315,093
----------- -----------
Unrealized gain................... $ 0 $ 106,063
----------- -----------
----------- -----------
</TABLE>

The federal income tax basis of the Fund's investments, at April 30, 1998 was
$1,026,195,791-High Yield Series; $438,671,525-Insured Series; and
$37,235,565-Intermediate Series and, accordingly, net unrealized appreciation of
investments for federal income tax purposes was as follows:
<TABLE>
<CAPTION>
Gross Gross
Net unrealized unrealized unrealized
Series appreciation appreciation depreciation
- --------------------- -------------- ----------- ----------
<S> <C> <C> <C>
High Yield........... $ 81,054,099 $90,185,030 $9,130,931
Insured.............. 20,404,291 21,977,695 1,573,404
Intermediate......... 1,264,532 1,334,659 70,127
</TABLE>

The High Yield Series has a net capital loss carryforward as of April 30, 1998
of approximately $17,547,000, of which $2,024,000 expires in 2002, $5,361,000
expires in 2003, $6,383,000 expires in 2004, $3,225,000 expires in 2005, and
$554,000 expires in 2006. No capital gains distribution is expected to be paid
to shareholders until net gains have been realized in excess of the aggregate of
such amounts. In addition, the High Yield Series elected to treat net realized
capital losses of approximately $6,709,700 incurred in the six-month period
ended April 30, 1998, as having been incurred in the following year.
- ------------------------------------------------------------
Note 5. Capital

Each series offers Class A, Class B, Class C and Class Z shares. Class A shares
are sold with a front-end sales charge of up to 3.0%. Class B shares are sold
with a contingent deferred sales charge which declines from 5% to zero depending
on the period of time the shares are held. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
- --------------------------------------------------------------------------------
B-66

<PAGE>

Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
The Fund has authorized an unlimited number of shares of beneficial interest of
each class at $.01 par value per share. Transactions in shares of beneficial
interest were as follows:
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class A Class A Class A
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 5,097,999 $ 57,395,615 569,674 $ 6,395,067 51,122 $ 558,941
Shares issued in reinvestment of
dividends and distributions.... 962,597 10,829,429 785,872 8,843,968 36,144 393,414
Shares reacquired................. (6,025,736) (67,587,666) (3,276,382) (36,775,017) (331,385) (3,600,677)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 34,860 637,378 (1,920,836) (21,535,982) (244,119) (2,648,322)
Shares issued upon conversion from
Class B........................ 6,417,324 71,773,373 3,118,260 35,134,908 160,123 1,739,629
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 6,452,184 $ 72,410,751 1,197,424 $ 13,598,926 (83,996) $ (908,693)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 2,690,433 $ 29,194,209 17,268,103 $ 190,281,225 146,988 $ 1,570,573
Shares issued in reinvestment of
dividends and distributions.... 816,257 8,853,738 562,530 6,209,882 33,834 360,674
Shares reacquired................. (5,951,712) (64,552,270) (20,358,917) (224,259,104) (505,221) (5,381,606)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before
conversion..................... (2,445,022) (26,504,323) (2,528,284) (27,767,997) (324,399) (3,450,359)
Shares issued upon conversion from
Class B........................ 12,411,968 133,842,041 8,887,896 97,509,503 443,554 4,710,903
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 9,966,946 $ 107,337,718 6,359,612 $ 69,741,506 119,155 $ 1,260,544
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class B Class B Class B
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 10,261,223 $ 115,317,304 894,372 $ 10,051,980 113,994 $ 1,243,792
Shares issued in reinvestment of
dividends and distributions.... 1,416,916 15,920,018 915,681 10,310,964 63,393 689,975
Shares reacquired................. (7,485,320) (84,004,151) (4,626,069) (51,987,346) (627,441) (6,818,594)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding before
conversion..................... 4,192,819 47,233,171 (2,816,016) (31,624,402) (450,054) (4,884,827)
Shares issued upon conversion from
Class A........................ (6,418,319) (71,773,373) (3,114,481) (35,134,908) (160,109) (1,739,629)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (2,225,500) $ (24,540,202) (5,930,497) $ (66,759,310) (610,163) $ (6,624,456)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 7,261,475 $ 78,657,488 991,206 $ 10,920,454 293,960 $ 3,134,459
Shares issued in reinvestment of
dividends and distributions.... 1,747,161 18,927,857 1,049,549 11,593,012 82,134 875,459
Shares reacquired................. (9,901,712) (107,242,000) (6,341,050) (69,974,266) (909,089) (9,694,638)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares outstanding
before conversion.............. (893,076) (9,656,655) (4,300,295) (47,460,800) (532,995) (5,684,720)
Shares reacquired upon conversion
into Class A................... (12,411,968) (133,842,041) (8,879,800) (97,509,503) (443,243) (4,710,903)
----------- ------------- ----------- ------------- -------- ------------
Net decrease in shares
outstanding.................... (13,305,044) $(143,498,696) (13,180,095) $(144,970,303) (976,238) $(10,395,623)
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-67

<PAGE>
Notes to Financial Statements PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class C Class C Class C
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 1,210,837 $ 13,633,168 75,353 $ 851,857 31,683 $ 345,224
Shares issued in reinvestment of
dividends and distributions.... 45,608 514,159 4,949 55,759 1,355 14,774
Shares reacquired................. (321,058) (3,613,378) (25,249) (284,339) (15,800) (171,265)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 935,387 $ 10,533,949 55,053 $ 623,277 17,238 $ 188,733
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
Year Ended April 30, 1997
- ----------------------------------
Shares issued..................... 505,330 $ 5,472,765 21,265 $ 234,063 28,931 $ 311,189
Shares issued in reinvestment of
dividends and distributions.... 28,059 304,264 3,510 38,759 436 4,639
Shares reacquired................. (256,031) (2,781,902) (47,234) (521,343) (26,221) (277,703)
----------- ------------- ----------- ------------- -------- ------------
Net increase (decrease) in shares
outstanding.................... 277,358 $ 2,995,127 (22,459) $ (248,521) 3,146 $ 38,125
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
<CAPTION>
High Yield Series Insured Series Intermediate Series
Class Z Class Z Class Z
---------------------------- ---------------------------- ------------------------
Year Ended April 30, 1998 Shares Amount Shares Amount Shares Amount
- ---------------------------------- ----------- ------------- ----------- ------------- -------- ------------
<S> <C> <C> <C> <C> <C> <C>
Shares issued..................... 737,972 $ 8,311,994 49,053 $ 550,297 96,575 $ 1,054,676
Shares issued in reinvestment of
dividends and distributions.... 29,882 337,131 1,039 11,710 1,711 18,647
Shares reacquired................. (141,036) (1,592,621) (13,642) (153,875) (11,026) (120,244)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 626,818 $ 7,056,504 36,450 $ 408,132 87,260 $ 953,079
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
September 16, 1996(a) Through
April 30, 1997
- ----------------------------------
Shares issued..................... 287,958 $ 3,134,548 1,377 $ 15,206 23,097 $ 245,675
Shares issued in reinvestment of
dividends and distributions.... 2,192 23,750 16 177 140 1,493
Shares reacquired................. (39,065) (425,418) (10) (115) (27) (281)
----------- ------------- ----------- ------------- -------- ------------
Net increase in shares
outstanding.................... 251,085 $ 2,732,880 1,383 $ 15,268 23,210 $ 246,887
----------- ------------- ----------- ------------- -------- ------------
----------- ------------- ----------- ------------- -------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class Z shares.
- ------------------------------------------------------------
Note 6. Subsequent Event

On June 23, 1998 the Trustees of the Fund approved a change in the name of the
High Yield Series to the High Income Series effective July 1, 1998.
- --------------------------------------------------------------------------------
B-68

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------------
Years Ended April 30,
-----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.70 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- -------- -------
Income from investment operations
Net investment income............................... .67(b) .70(b) .72(b) .72(b) .72
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .14 (.02) (.02) (.39)
-------- -------- -------- -------- -------
Total from investment operations................. 1.14 .84 .70 .70 .33
-------- -------- -------- -------- -------
Less distributions
Dividends from net investment income................ (.67) (.70) (.72) (.72) (.72)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- -------- -------
Total distributions.............................. (.67) (.70) (.72) (.72) (.73)
-------- -------- -------- -------- -------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.70 $ 10.72 $ 10.74
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
TOTAL RETURN(a):.................................... 10.80% 8.03% 6.55% 6.90% 2.88%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $421,504 $334,062 $223,073 $115,501 $54,491
Average net assets (000)............................ $381,735 $294,940 $162,329 $ 65,207 $52,982
Ratios to average net assets:
Expenses, including distribution fees............ .62%(b) 0.64%(b) 0.64%(b) 0.69%(b) 0.69%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.59%
Net investment income............................ 6.03%(b) 6.44%(b) 6.58%(b) 6.83%(b) 6.42%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 13% 26% 35% 39% 36%
</TABLE>
- --------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-69

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
----------------------------------------------------------------
Years Ended April 30,
----------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $ 10.74 $ 11.14
-------- -------- -------- ---------- ----------
Income from investment operations
Net investment income............................... .63(b) .66(b) .68(b) .68(b) .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.02) (.39)
-------- -------- -------- ---------- ----------
Total from investment operations................. 1.10 .81 .65 .66 .29
-------- -------- -------- ---------- ----------
Less distributions
Dividends from net investment income................ (.63) (.66) (.68) (.68) (.68)
Distributions from capital gains.................... -- -- -- -- (.01)
-------- -------- -------- ---------- ----------
Total distributions.............................. (.63) (.66) (.68) (.68) (.69)
-------- -------- -------- ---------- ----------
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $ 10.72 $ 10.74
-------- -------- -------- ---------- ----------
-------- -------- -------- ---------- ----------
TOTAL RETURN(a):.................................... 10.36% 7.71% 6.12% 6.37% 2.46%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $669,223 $665,525 $799,048 $ 934,725 $1,099,640
Average net assets (000)............................ $669,132 $725,305 $900,115 $1,024,132 $1,132,653
Ratios to average net assets:
Expenses, including distribution fees............ 1.02%(b) 1.04%(b) 1.04%(b) 1.09%(b) 1.09%
Expenses, excluding distribution fees............ .52%(b) 0.54%(b) 0.54%(b) 0.59%(b) 0.58%
Net investment income............................ 5.63%(b) 6.05%(b) 6.19%(b) 6.37%(b) 6.02%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-70

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights HIGH YIELD SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.84 $ 10.69 $ 10.72 $10.79 $10.83
--------- --------- --------- ----- -----
Income from investment operations
Net investment income (b)........................... .61 .63 .65 .49 .68
Net realized and unrealized gain (loss) on
investment transactions.......................... .47 .15 (.03) (.07) .47
--------- --------- --------- ----- -----
Total from investment operations................. 1.08 .78 .62 .42 1.15
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.61) (.63) (.65) (.49) (.68)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.31 $ 10.84 $ 10.69 $10.72 $11.30
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 10.09% 7.44% 5.86% 3.91% 10.91%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $20,554 $ 9,563 $ 6,471 $3,208 $9,919
Average net assets (000)............................ $14,932 $ 8,060 $ 5,608 $1,385 $6,064
Ratios to average net assets:
Expenses, including distribution fees (b)........ 1.27% 1.29% 1.29% 1.34%(e) .52%
Expenses, excluding distribution fees (b)........ .52% 0.54% 0.54% 0.59%(e) .52%
Net investment income (b)........................ 5.39% 5.80% 5.93% 6.34%(e) 6.14%

<CAPTION>
September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.79
-----
Income from investment operations
Net investment income (b)........................... .45
Net realized and unrealized gain (loss) on
investment transactions.......................... .04
-----
Total from investment operations................. .49
-----
Less distributions
Dividends from net investment income................ (.45)
-----
Net asset value, end of year........................ $ 10.83
-----
-----
TOTAL RETURN(a):.................................... 4.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 2,719
Average net assets (000)............................ $ 704
Ratios to average net assets:
Expenses, including distribution fees (b)........ 0.54%(e)
Expenses, excluding distribution fees (b)........ 0.54%(e)
Net investment income (b)........................ 6.55%(e)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-71

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
----------------------------------------------------------

Years Ended April 30,
----------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.90 $ 10.94 $ 10.83 $ 10.71 $ 11.44
-------- -------- -------- ------- -------
Income from investment operations
Net investment income............................... .53(b) .55(b) .58(b) .58(b) .58
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .12 (.43)
-------- -------- -------- ------- -------
Total from investment operations................. .93 .63 .69 .70 .15
-------- -------- -------- ------- -------
Less distributions
Dividends from net investment income................ (.53) (.55) (.58) (.58) (.58)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- ------- -------
Total distributions.............................. (.78) (.67) (.58) (.58) (.88)
-------- -------- -------- ------- -------
Net asset value, end of year........................ $ 11.05 $ 10.90 $ 10.94 $ 10.83 $ 10.71
-------- -------- -------- ------- -------
-------- -------- -------- ------- -------
TOTAL RETURN(a):.................................... 8.67% 5.74% 6.47% 6.73% 1.04%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $224,409 $208,411 $139,548 $75,800 $30,669
Average net assets (000)............................ $222,115 $187,371 $102,456 $39,471 $32,309
Ratios to average net assets:
Expenses, including distribution fees............ 0.69%(b) 0.68%(b) 0.68%(b) 0.74%(b) 0.71%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.75%(b) 4.95%(b) 5.20%(b) 5.45%(b) 5.09%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 85% 110% 68% 64% 105%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-72

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
------------------------------------------------------------

Years Ended April 30,
------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $ 10.71 $ 11.44
-------- -------- -------- -------- --------
Income from investment operations
Net investment income............................... .49(b) .50(b) .54(b) .54(b) .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .13 (.43)
-------- -------- -------- -------- --------
Total from investment operations................. .89 .58 .65 .67 .11
-------- -------- -------- -------- --------
Less distributions
Dividends from net investment income................ (.49) (.50) (.54) (.54) (.54)
Distributions in excess of net investment income.... --(c) (.01) -- -- --
Distributions from capital gains.................... (.25) (.11) -- -- (.30)
-------- -------- -------- -------- --------
Total distributions.............................. (.74) (.62) (.54) (.54) (.84)
-------- -------- -------- -------- --------
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $ 10.84 $ 10.71
-------- -------- -------- -------- --------
-------- -------- -------- -------- --------
TOTAL RETURN(a):.................................... 8.23% 5.32% 6.04% 6.40% 0.63%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $236,370 $298,005 $443,391 $567,648 $740,447
Average net assets (000)............................ $270,553 $365,891 $524,452 $660,237 $807,794
Ratios to average net assets:
Expenses, including distribution fees............ 1.09%(b) 1.08%(b) 1.08%(b) 1.14%(b) 1.11%
Expenses, excluding distribution fees............ 0.59%(b) 0.58%(b) 0.58%(b) 0.64%(b) 0.61%
Net investment income............................ 4.35%(b) 4.54%(b) 4.80%(b) 4.99%(b) 4.69%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
(c) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-73

<PAGE>

PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INSURED SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.91 $ 10.95 $ 10.84 $10.79 $10.91
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .46 .48 .51 .39 .54
Net realized and unrealized gain (loss) on
investment transactions.......................... .40 .08 .11 .05 .39
--------- --------- --------- ----- -----
Total from investment operations................. .86 .56 .62 .44 .93
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.46) (.48) (.51) (.39) (.54)
Distributions in excess of net investment income.... --(f) (.01) -- -- --(f)
Distributions from capital gains.................... (.25) (.11) -- -- (.25)
--------- --------- --------- ----- -----
Total distributions.............................. (.71) (.60) (.51) (.39) (.79)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 11.06 $ 10.91 $ 10.95 $10.84 $11.05
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 7.96% 5.06% 5.78% 4.03% 8.68%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 1,509 $ 888 $ 1,137 $ 525 $ 418
Average net assets (000)............................ $ 1,142 $ 973 $ 827 $ 224 $ 173
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.34% 1.33% 1.33% 1.39%(e) 0.60%
Expenses, excluding distribution fees(b)......... 0.59% 0.58% 0.58% 0.64%(e) 0.60%
Net investment income(b)......................... 4.11% 4.29% 4.56% 4.92%(e) 4.92%

September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 11.05
-----
Income from investment operations
Net investment income(b)............................ .36
Net realized and unrealized gain (loss) on
investment transactions.......................... (.02)
-----
Total from investment operations................. .34
-----
Less distributions
Dividends from net investment income................ (.36)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... (.11)
-----
Total distributions.............................. (.48)
-----
Net asset value, end of year........................ $ 10.91
-----
-----
TOTAL RETURN(a):.................................... 2.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 15
Average net assets (000)............................ $ 10
Ratios to average net assets:
Expenses, including distribution fees(b)......... 0.58%(e)
Expenses, excluding distribution fees(b)......... 0.58%(e)
Net investment income(b)......................... 4.18%(e)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
(f) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-74

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------
Years Ended April 30,
------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.67 $11.08
------- ------- ------- ------- ------
Income from investment operations
Net investment income............................... .43(b) .46(b) .47(b) .51(b) .53
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.03) (.19)
------- ------- ------- ------- ------
Total from investment operations................. .71 .41 .67 .48 .34
------- ------- ------- ------- ------
Less distributions
Dividends from net investment income................ (.43) (.46) (.47) (.51) (.53)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- ------
Total distributions.............................. (.49) (.47) (.47) (.70) (.75)
------- ------- ------- ------- ------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $10.67
------- ------- ------- ------- ------
------- ------- ------- ------- ------
TOTAL RETURN(a):.................................... 6.76% 3.86% 6.48% 4.52% 2.83%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $13,126 $13,740 $12,552 $10,507 $5,810
Average net assets (000)............................ $13,591 $13,487 $12,604 $ 7,742 $4,981
Ratios to average net assets:
Expenses, including distribution fees............ 1.31%(b) 1.15%(b) 1.16%(b) 1.05%(b) 1.00%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.99%(b) 4.30%(b) 4.36%(b) 4.75%(b) 4.63%
For Class A, B, C and Z shares:
Portfolio turnover rate.......................... 54% 46% 35% 30% 55%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-75

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Years Ended April 30,
-------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $ 10.68 $ 11.09
------- ------- ------- ------- -------
Income from investment operations
Net investment income............................... .39(b) .42(b) .43(b) .45(b) .48
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.04) (.19)
------- ------- ------- ------- -------
Total from investment operations................. .67 .37 .63 .41 .29
------- ------- ------- ------- -------
Less distributions
Dividends from net investment income................ (.39) (.42) (.43) (.45) (.48)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- (.18) (.22)
------- ------- ------- ------- -------
Total distributions.............................. (.45) (.43) (.43) (.64) (.70)
------- ------- ------- ------- -------
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $ 10.45 $ 10.68
------- ------- ------- ------- -------
------- ------- ------- ------- -------
TOTAL RETURN(a):.................................... 6.33% 3.44% 6.05% 3.99% 2.43%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $24,017 $29,980 $40,550 $51,039 $65,215
Average net assets (000)............................ $27,175 $35,221 $46,127 $60,174 $59,811
Ratios to average net assets:
Expenses, including distribution fees............ 1.71%(b) 1.55%(b) 1.56%(b) 1.45%(b) 1.40%
Expenses, excluding distribution fees............ 1.21%(b) 1.05%(b) 1.06%(b) 0.95%(b) 0.90%
Net investment income............................ 3.59%(b) 3.89%(b) 3.96%(b) 4.35%(b) 4.23%
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
(b) Net of management fee waiver.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-76

<PAGE>
PRUDENTIAL MUNICIPAL BOND FUND
Financial Highlights INTERMEDIATE SERIES
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Class Z
---------------------------------------------------- ----------
August 1,
1994(c) Year
Years Ended April 30, Through Ended
------------------------------------- April 30, April 30,
1998 1997 1996 1995 1998
--------- --------- --------- ---------- ----------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.59 $ 10.65 $ 10.45 $10.54 $10.59
--------- --------- --------- ----- -----
Income from investment operations
Net investment income(b)............................ .36 .39 .40 .35 .44
Net realized and unrealized gain (loss) on
investment transactions.......................... .28 (.05) .20 (.08) .28
--------- --------- --------- ----- -----
Total from investment operations................. .64 .34 .60 .27 .72
--------- --------- --------- ----- -----
Less distributions
Dividends from net investment income................ (.36) (.39) (.40) (.35) (.44)
Distributions in excess of net investment income.... -- (.01) -- (.01) --
Distributions from capital gains.................... (.06) -- -- -- (.06)
--------- --------- --------- ----- -----
Total distributions.............................. (.42) (.40) (.40) (.36) (.50)
--------- --------- --------- ----- -----
Net asset value, end of year........................ $ 10.81 $ 10.59 $ 10.65 $10.45 $10.81
--------- --------- --------- ----- -----
--------- --------- --------- ----- -----
TOTAL RETURN(a):.................................... 6.07% 3.17% 5.79% 2.14% 6.86%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 449 $ 257 $ 225 $ 167 $1,194
Average net assets (000)............................ $ 381 $ 149 $ 197 $ 28 $ 447
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.96% 1.80% 1.81% 1.81%(e) 1.21%
Expenses, excluding distribution fees(b)......... 1.21% 1.05% 1.06% 1.06%(e) 1.21%
Net investment income(b)......................... 3.33% 3.65% 3.71% 4.34%(e) 4.09%

September 16,
1996(d)
Through
April 30,
1997
-------------
<S> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.................. $ 10.63
-----
Income from investment operations
Net investment income(b)............................ .31
Net realized and unrealized gain (loss) on
investment transactions.......................... (.03)
-----
Total from investment operations................. .28
-----
Less distributions
Dividends from net investment income................ (.31)
Distributions in excess of net investment income.... (.01)
Distributions from capital gains.................... --
-----
Total distributions.............................. (.32)
-----
Net asset value, end of year........................ $ 10.59
-----
-----
TOTAL RETURN(a):.................................... 2.50%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)....................... $ 246
Average net assets (000)............................ $ 63
Ratios to average net assets:
Expenses, including distribution fees(b)......... 1.05%(e)
Expenses, excluding distribution fees(b)......... 1.05%(e)
Net investment income(b)......................... 4.65%(e)
</TABLE>
- ---------------
(a) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(b) Net of management fee waiver.
(c) Commencement of offering of Class C shares.
(d) Commencement of offering of Class Z shares.
(e) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. B-77

<PAGE>
Report of Independent Accountants PRUDENTIAL MUNICIPAL BOND FUND
- --------------------------------------------------------------------------------
To the Shareholders and Trustees of
Prudential Municipal Bond Fund

In our opinion, the accompanying statements of assets and liabilities, including
the portfolios of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of High Yield Series, Insured Series
and Intermediate Series (constituting Prudential Municipal Bond Fund, hereafter
referred to as the 'Fund') at April 30, 1998, the results of each of their
operations for the year then ended and the changes in each of their net assets
and the financial highlights for each of the two years in the period then ended,
in conformity with generally accepted accounting principles. These financial
statements and financial highlights (hereafter referred to as 'financial
statements') are the responsibility of the Fund's management; our responsibility
is to express an opinion on these financial statements based on our audits. We
conducted our audits of these financial statements in accordance with generally
accepted auditing standards which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at April 30, 1998 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above. The accompanying financial
highlights for each of the three years in the period ended April 30, 1996 were
audited by other independent accountants, whose opinion dated June 13, 1996 was
unqualified.

PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
June 18, 1998
- --------------------------------------------------------------------------------
B-78

<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION

The following terms are used in mutual fund investing.

ASSET ALLOCATION

Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall investment
portfolio helps to reduce risk and to potentially provide stable returns, while
enabling investors to work toward their financial goal(s). Asset allocation is
also a strategy to gain exposure to better performing asset classes while
maintaining investment in other asset classes.

DIVERSIFICATION

Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.

DURATION

Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.

Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
payments. Duration is expressed as a measure of time in years--the longer the
duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks, such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).

MARKET TIMING

Market timing--buying securities when prices are low and selling them when
prices are relatively higher--may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.

POWER OF COMPOUNDING

Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.

STANDARD DEVIATION

Standard deviation is an absolute (non-relative) measure of volatility
which, for a mutual fund, depicts how widely the returns varied over a certain
period of time. When a fund has a high standard deviation, its range of
performance has been very wide, implying greater volatility potential. Standard
deviation is only one of several measures of a fund's volatility.

I-1
<PAGE>
APPENDIX II--HISTORICAL PERFORMANCE DATA

The historical performance data contained in this Appendix relies on data
obtained from statistical services, reports and other services believed by the
Manager to be reliable. The information has not been independently verified by
the Manager.

This chart shows the long-term performance of various asset classes and the
rate of inflation.

EACH INVESTMENT PROVIDES A DIFFERENT OPPORTUNITY.

[CHART]

- ------------------------
Source: Stocks, Bonds, Bills and Inflation 1996 Yearbook, Ibbotson Associates',
Chicago, Illinois (annually updates work by Roger G. Ibbotson and Rex A.
Singlefield). Used with permission. All rights reserved. This chart is for
illustrative purposes only and is not indicative of the past, present, or future
performance of any asset class of any Prudential Mutual Fund.

Generally, stock returns are due to capital appreciation and reinvesting any
gains. Bond returns are due mainly to reinvesting interest. Also, stock prices
are usually more volatile than bond prices over the long-term.

Small stock returns for 1926-1980 are those of stocks comprising the 5th
quintile of the New York Stock Exchange. Thereafter, returns are those of the
Dimensional Fund Advisors (DFA) Small Company Fund. Common stock returns are
based on the S&P Composite Index, a market-weighted, unmanaged index of 500
stocks (currently) in a variety of industries. It is often used as a broad
measure of stock market performance.

Long-term government bond returns are represented by a portfolio that contains
only one bond with a maturity of roughly 20 years. At the beginning of each year
a new bond with a then-current coupon replaces the old bond. Treasury bill
returns are for a one-month bill. Treasuries are guaranteed by the government as
to the timely payment of principal and interest; equities are not. Inflation is
measured by the consumer price index (CPI).

Impact of Inflation. The "real" rate of investment return is that which exceeds
the rate of inflation, the percentage change in the value of consumer goods and
the general cost of living. A common goal of long-term investors is to outpace
the erosive impact of inflation on investment returns.

II-1
<PAGE>
Set forth below is historical performance data relating to various sectors
of the fixed-income securities markets. The chart shows the historical total
returns of U.S. Treasury bonds, U.S. mortgage securities, U.S. corporate bonds,
U.S. high yield bonds and world government bonds on an annual basis from 1987
through 1997. The total returns of the indices include accrued interest, plus
the price changes (gains or losses) of the underlying securities during the
period mentioned. The data is provided to illustrate the varying historical
total returns and investors should not consider this performance data as an
indication of the future performance of the Fund or of any sector in which the
Fund invests.

All information relies on data obtained from statistical services, reports
and other services believed by the Manager to be reliable. Such information has
not been verified. The figures do not reflect the operating expenses and fees of
a mutual fund. See "Fund Expenses" in the Prospectus. The net effect of the
deduction of the operating expenses of a mutual fund on these historical total
returns, including the compounded effect over time, could be substantial.

HISTORICAL TOTAL RETURNS OF DIFFERENT BOND MARKET SECTORS

<TABLE>
<CAPTION>
'87 '88 '89 '90 '91 '92 '93 '94 '95 '96 '97
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. GOVERNMENT
TREASURY
BONDS(1) 2.0% 7.0% 14.4% 8.5% 15.3% 7.2% 10.7% (3.4)% 18.4% 2.7% 9.6%
U.S. GOVERNMENT
MORTGAGE
SECURITIES(2) 4.3% 8.7% 15.4% 10.7% 15.7% 7.0% 6.8% (1.6)% 16.8% 5.4% 9.5%
U.S. INVESTMENT GRADE
CORPORATE
BONDS(3) 2.6% 9.2% 14.1% 7.1% 18.5% 8.7% 12.2% (3.9)% 22.3% 3.3% 10.2%
U.S.
HIGH YIELD
CORPORATE
BONDS(4) 5.0% 12.5% 0.8% (9.6)% 46.2% 15.8% 17.1% (1.0)% 19.2% 11.4% 12.8%
WORLD
GOVERNMENT
BONDS(5) 35.2% 2.3% (3.4)% 15.3% 16.2% 4.8% 15.1% 6.0% 19.6% 4.1% (4.3)%
DIFFERENCE BETWEEN HIGHEST
AND LOWEST RETURN PERCENT 33.2 10.2 18.8 24.9 30.9 11.0 10.3 9.9 5.5 8.7% 17.1%
</TABLE>

(1) LEHMAN BROTHERS TREASURY BOND INDEX is an unmanaged index made up of over
150 public issues of the U.S. Treasury having maturities of at least one year.

(2) LEHMAN BROTHERS MORTGAGE-BACKED SECURITIES INDEX is an unmanaged index that
includes over 600 15- and 30-year fixed-rate mortgage-backed securities of the
Government National Mortgage Association (GNMA), Federal National Mortgage
Association (FNMA), and the Federal Home Loan Mortgage Corporation (FHLMC).

(3) LEHMAN BROTHERS CORPORATE BOND INDEX includes over 3,000 public fixed-rate,
nonconvertible investment-grade bonds. All bonds are U.S. dollar-denominated
issues and include debt issued or guaranteed by foreign sovereign governments,
municipalities, governmental agencies or international agencies. All bonds in
the index have maturities of at least one year.

(4) LEHMAN BROTHERS HIGH YIELD BOND INDEX is an unmanaged index comprising over
750 public, fixed-rate, nonconvertible bonds that are rated Ba1 or lower by
Moody's Investors Service (or rated BB+ or lower by Standard & Poor's or Fitch
Investors Service). All bonds in the index have maturities of at least one year.

(5) SALOMON BROTHERS WORLD GOVERNMENT INDEX (NON U.S.) includes over 800 bonds
issued by various foreign governments or agencies, excluding those in the U.S.,
but including those in Japan, Germany, France, the U.K., Canada, Italy,
Australia, Belgium, Denmark, the Netherlands, Spain, Sweden, and Austria. All
bonds in the index have maturities of at least one year.

II-2
<PAGE>
This chart below shows the historical volatility of general interest rates
as measured by the long U.S. Treasury Bond.

LONG U.S. TREASURY BOND YIELD IN PERCENT (1926-1997)

[CHART]

- ------------------------
Source: Stocks, Bonds, Bills, and Inflation 1997 Yearbook, Ibbotson Associates,
Chicago (annually updates work by Roger G. Ibbotson and Rex A. Sinquefield).
Used with permission. All rights reserved. The chart illustrates the historical
yield of the long-term U.S. Treasury Bond from 1926-1997. Yields represent that
of an annually renewed one-bond portfolio with a remaining maturity of
approximately 20 years. This chart is for illustrative purposes and should not
be construed to represent the yields of any Prudential Mutual Fund.

II-3
<PAGE>
APPENDIX III--INFORMATION RELATING TO THE PRUDENTIAL

Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.

INFORMATION ABOUT PRUDENTIAL

The Manager and PIC(1) are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1997. Its primary business is to offer a full range of products and services in
three areas: insurance, investments and home ownership for individuals and
families; health-care management and other benefit programs for employees of
companies and members of groups; and asset management for institutional clients
and their associates. Prudential (together with its subsidiaries) employs more
than 79,000 persons worldwide, and maintains a sales force of approximately
10,100 agents and 6,500 financial advisors. Prudential is a major issuer of
annuities, including variable annuities. Prudential seeks to develop innovative
products and services to meet consumer needs in each of its business areas.
Prudential uses the rock of Gibraltar as its symbol. The Prudential rock is a
recognized brand name throughout the world.

INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to more than 40 million people
worldwide--one of every five people in the United States. Long one of the
largest issuers of individual life insurance, the Prudential has 25 million life
insurance policies in force today with a face value of $1 trillion. Prudential
has the largest capital base ($12.1 billion) of any life insurance company in
the United States. Prudential provides auto insurance for more than 1.5 million
cars and insures more than 1.2 million homes.

MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1997, Prudential had more than $370 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $211 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.

REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)

HEALTHCARE. Over two decades ago, Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, almost 4.9 million
Americans receive healthcare from a Prudential managed care membership.

FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has nearly $1 billion in assets and serves nearly 1.5 million
customers across 50 states.

INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS

As of December 31, 1997, Prudential Investments Fund Management was the 18th
largest mutual fund company in the country, with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.

The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.

From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
- ------------------------
(1) The Prudential Investments,a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp. as the
subadviser to Prudential Jennison Series Fund, Inc. and Mercator Asset
Management LP as the subadvisor to International Stock Series, a portfolio
of Prudential World Fund, Inc. There are multiple subadvisers for The Target
Portfolio Trust.

(2) As of December 31, 1994.

III-1
<PAGE>
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. Forbes considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.

HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor
approximately 200 issues held in the Prudential High Yield Fund (currently the
largest fund of its kind in the country) along with 100 or so other high yield
bonds, which may be considered for purchase.(3) Non-investment grade bonds, also
known as junk bonds or high yield bonds, are subject to a greater risk of loss
of principal and interest including default risk than higher-rated bonds.
Prudential high yield portfolio managers and analysts meet face-to-face with
almost every bond issuer in the High Yield Fund's portfolio annually, and have
additional telephone contact throughout the year.

Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.

Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.

Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.

Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.

Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.

Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).

TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)

Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.

- ------------------------
(3) As of December 31, 1996. The number of bonds and the size of the Fund are
subject to change.

(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.

(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.

(6) As of December 31, 1994.

III-2
<PAGE>
INFORMATION ABOUT PRUDENTIAL SECURITIES

Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 6,000 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1997, assets held by Prudential Securities for its
clients approximated $235 billion. During 1997, over 29,000 new customer
accounts were opened each month at PSI.(7)

Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of REGISTERED REP,
an industry publication, Prudential Securities Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).

In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)

In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial Architect-SM-, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.

For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.

- ------------------------
(7) As of December 31, 1997.

(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
are produced by taking the number of votes awarded to an individual analyst
and weighting them based on the size of the voting institution. In total,
the magazine sends its survey to approximately 2,000 institutions and a
group of European and Asian institutions.

III-3